Monday, November 9, 2015

Globalized Death Spiral: Race To Insolvency

Careful what you wish for...

The de facto Idiocracy is now going to learn Globalization's hardest lesson - that as prices fall, output increases to maintain revenue aka. (Price x Quantity) - In an accelerating downward death spiral. It's a poverty trap the Third World knows full well, and a lesson the developed world is in the process of getting bludgeoned with...

WolfStreet Nov. 5, 2015
Capital Destruction Across Oil & Gas Sector
Unlike mark-to-market securitized instruments, oil and gas properties sit on balance sheets until accountants re-value them. Across the Oil and gas sector, "asset impairment" aka. writedowns are the next shoe to drop. It's the point in time when insolvency becomes recognized and when debt covenants bring bankrupcty. 

"Turns out, what started in Q4 last year is getting worse relentlessly. And now it’s getting serious: plunging revenues, squeezed operating margins, whopping impairment charges, and horrendous losses are combining into a very toxic mix."


Oil suppliers are in a race for the bottom, attempting to offset low prices with increased volume, further undermining price. All in an attempt to stave off default. This race is occurring at the corporate level AND at the national level. 

It's a contest for who can stand the most pain. And then some more after that. 

Something's going to break...
U.S. oil stored (days of storage) with daily production (red):
2009 bottom circled:

Junk bonds

We need not expect oil to stop flowing in Chapter 11 bankruptcy aka. "restructuring" - the marginal cost of pumping another barrel of oil is well below the market.