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Is the oil crisis similar to the subprime mortgage crisis?
Posted on 4/20/20 at 3:58 pm
Posted on 4/20/20 at 3:58 pm
This is an unprecedented event, kind of like how the subprime mortgage collapse was unprecedented. The market in mid-2007 knew mortgage backed securities had issues but didn't know how or if it would trickle down to the broader market. The data was right in front of them. Foreclosures were at extremely high levels. Bear Stearns announced its hedge funds had imploded in July of 2007, several months before the rest of the market tanked. And then suddenly the broader market realized how tied the rest of the market was to this sector.
I sense that the broader market is acting like it did in the 3rd quarter of 2007. Oil is at a true crisis point and the rest of the market is looking at it as if it is someone else's problem. Even energy stocks are up 20% or more from their March lows. Citi also had a rebound in August and again in October of 2007 just before it fell like a knife. And those rebounds happened when people knew banks had a problem.
Someone with more experience in the oil industry than myself can probably explain all the micro level reasons this is different, but on a macro level they sure look eerily similar to me. I completely liquidated my portfolio today.
I sense that the broader market is acting like it did in the 3rd quarter of 2007. Oil is at a true crisis point and the rest of the market is looking at it as if it is someone else's problem. Even energy stocks are up 20% or more from their March lows. Citi also had a rebound in August and again in October of 2007 just before it fell like a knife. And those rebounds happened when people knew banks had a problem.
Someone with more experience in the oil industry than myself can probably explain all the micro level reasons this is different, but on a macro level they sure look eerily similar to me. I completely liquidated my portfolio today.
3
Posted on 4/20/20 at 4:01 pm to MillerLiteTime
No. Subprime had never been handled before. We’ve been here before with oil. Today’s May Futures are not indicative of the whole oil market. See the 1980s oil glut, which is similar to this. The world price of oil had peaked in 1980 at over US$35 per barrel (equivalent to $109 per barrel in 2020 dollars, when adjusted for inflation); it fell in 1986 from $27 to below $10 ($63 to $23 in 2020 dollars).
This post was edited on 4/20/20 at 4:04 pm
Posted on 4/20/20 at 4:12 pm to go ta hell ole miss
quote:
No. We’ve been here before. Today’s May Futures are not indicative of the whole oil market.
I understand the difference in the May futures vs. June, July, etc. But those futures are still stable on the assumption that the storage and supply/demand crisis ends. Banks are heavily tied to energy, both in general loans as well as hedging.
quote:
The world price of oil had peaked in 1980 at over US$35 per barrel (equivalent to $109 per barrel in 2020 dollars, when adjusted for inflation); it fell in 1986 from $27 to below $10 ($63 to $23 in 2020 dollars).
So yes we have seen $23 oil. We have never seen $1 oil (or especially not $-37 oil).
Posted on 4/20/20 at 4:14 pm to MillerLiteTime
quote:
Is the oil crisis similar to the subprime mortgage crisis?
Some segments of the economy benefit from cheap oil.
I don't know of any segments that benefited from people not paying their mortgages.
Posted on 4/20/20 at 4:21 pm to LSUFanHouston
how about the retail stores, restaurants and colleges that people spent their money on instead of their mortgage? The owners of those business that used that money on everything but their mortgage? They were operating on someone else's money that kept them propped up enough to swim until the banks crashed.
We are splurging on cheap oil now, but that is not sustainable for the future. Eventually demand will meet supply and prices will shoot up again, but will they be too high that people can't afford them? Thus creating another gap?
We are splurging on cheap oil now, but that is not sustainable for the future. Eventually demand will meet supply and prices will shoot up again, but will they be too high that people can't afford them? Thus creating another gap?
This post was edited on 4/20/20 at 7:22 pm
Posted on 4/20/20 at 4:29 pm to LSUFanHouston
quote:
Some segments of the economy benefit from cheap oil.
I don't know of any segments that benefited from people not paying their mortgages.
But most of the industries that benefit from cheap oil (airlines, trucking, etc) are harmed when cities like Houston have an unemployment and housing crisis from an energy collapse. Affordable oil is great for a lot of industries. An oil collapse is a net loss for almost all industries.
Posted on 4/20/20 at 4:44 pm to MillerLiteTime
quote:
So yes we have seen $23 oil. We have never seen $1 oil (or especially not $-37 oil).
We did not see negative $37 oil today.
Posted on 4/20/20 at 4:48 pm to MillerLiteTime
And just as a reminder, Warren Buffett is sitting on several hundred billion in cash right now waiting to buy stocks at undervalued or even just fair prices, and he still hasn't spent a dime of it. It doesn't mean he is right, but it does mean that a legend at timing and valuing the market still doesn't think we have hit anywhere near a bottom.
Posted on 4/20/20 at 4:54 pm to go ta hell ole miss
quote:
We did not see negative $37 oil today.
I get it. It's not the entire oil market or the value of oil in June or July. But the market has never seen a time where you couldn't give WTI oil away. Take it for whatever it means, but if you are a purchaser of WTI oil today and you don't want to obligate yourself to have to accept a delivery of oil in May, you had to pay someone 37 bucks a barrel today to take that obligation off your hands. The overall market is still trying to figure out what that means and my suspicion is it means a lot more than a 2% drop.
Posted on 4/21/20 at 12:30 pm to go ta hell ole miss
quote:
See the 1980s oil glut, which is similar to this. The world price of oil had peaked in 1980 at over US$35 per barrel (equivalent to $109 per barrel in 2020 dollars, when adjusted for inflation); it fell in 1986 from $27 to below $10 ($63 to $23 in 2020 dollars).
So the lowest we have ever seen oil prior to this was $23 (adjusted for inflation). June futures, what all the "don't panic" people were referring to yesterday as the "real" price of oil, is now $9 a barrel. I'd say it is panic time and the market is still acting like all is well.
Posted on 4/21/20 at 1:54 pm to LSUFanHouston
quote:
I don't know of any segments that benefited from people not paying their mortgages.
Posted on 4/21/20 at 2:12 pm to MillerLiteTime
quote:
and the market is still acting like all is well.
What market are you following?
Posted on 4/21/20 at 6:53 pm to LSUFanHouston
SCION CAPITAL hedge fund for starters
MIKE BURRY!
MIKE BURRY!
Posted on 4/21/20 at 11:36 pm to MillerLiteTime
What you have to wonder is, will there be such a massive collapse and shutdown of oil production, that in 6 months resurgent demand causes prices to springboard to $200 which again roils markets. My prediction anyways.
Posted on 4/22/20 at 6:46 am to TDFreak
Yep
This is setting the stage for hyper inflation.
This is setting the stage for hyper inflation.
Posted on 4/22/20 at 7:16 am to KillTheGophers
I'm less concerned about hyperinflation from the oil price collapse and more concerned about destabilization of oil industry dependent countries.
With the collapse of demand they cannot pump their way out of deficits. Storage is the limiting factor here. Saudi and russia made a calculated play to drive out US producers. Not a bad strategic move, however i don't think they thought it would be this effective.
Smaller opec nations will end up going rogue on this and it may be the end of an effective opec partnership as we know it. Regardless of how you feel about opec, it had a stabilizing effect on the market.
With time domestic markets will level off as demand comes back and supply decreases, but i don't know what the desperation of countries such as kuwait, venezuela, iran, iraq and possibly even saudi will bring. The talk was saudi and russia could make it years at 30, but they cannot sustain their domestic programs very long at 10-15 which is where the true price is hovering.
With the collapse of demand they cannot pump their way out of deficits. Storage is the limiting factor here. Saudi and russia made a calculated play to drive out US producers. Not a bad strategic move, however i don't think they thought it would be this effective.
Smaller opec nations will end up going rogue on this and it may be the end of an effective opec partnership as we know it. Regardless of how you feel about opec, it had a stabilizing effect on the market.
With time domestic markets will level off as demand comes back and supply decreases, but i don't know what the desperation of countries such as kuwait, venezuela, iran, iraq and possibly even saudi will bring. The talk was saudi and russia could make it years at 30, but they cannot sustain their domestic programs very long at 10-15 which is where the true price is hovering.
Posted on 4/22/20 at 7:30 am to RJSambola
Saudi and Russia played themselves. Boom!
Yeah, and expect more destabilization in those countries you mentioned. Perhaps war.
Yeah, and expect more destabilization in those countries you mentioned. Perhaps war.
Posted on 4/22/20 at 7:30 am to TDFreak
quote:
will there be such a massive collapse and shutdown of oil production, that in 6 months resurgent demand causes prices to springboard to $200 which again roils markets. My prediction anyways.
Nah
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