Category Archives: Gas Price

Something Rotten Is Piling Up In This Economy

Total US business inventories balloon to Lehman-Moment levels

https://farm4.staticflickr.com/3912/15252459662_c459d49944_h.jpgby Wolf Richter

“We do have more work to do in the US,” admitted John Bryant, CEO of Kellogg’s which makes Pringles, Pop Tarts, Kashi Cereal, and a million other things that consumers are increasingly reluctant or unable to buy. He was trying to explain the crummy quarterly results and the big-fat operating loss of $422 million, along with a lousy outlook that sent its stock careening down 4.5% during the rest of the day.

Then in the evening, ConAgra, with brands like Healthy Choice for consumers and something yummy they call “commercial food” for restaurants, cut its fiscal 2015 earnings guidance, citing a laundry list of problems, including the “strengthening dollar” and “a higher-than-planned mark-to-market loss from certain commodity index hedges.” But it blamed two operating issues “for the majority of the EPS cut: “a highly competitive bidding environment” and “execution shortfalls.”

After which confession time still wasn’t over: it would be “evaluating the need” for additional write-offs. What had gone well? Cost cutting – “strong SG&A efficiencies,” the statement called it. But the pandemic cost-cutting by corporate America represents wages and other companies’ sales.

It’s tough out there for companies that have to deal with the over-indebted, under-employed, strung-out American consumers with fickle loyalties and finicky tastes, who have been subjected to this corporate cost-cutting for years.

And so retail sales, according to the Commerce Department, dropped a seasonally adjusted 0.8% in January. That’s on top of a 0.9% decline in December. The hitherto inconceivable is happening: folks are saving money on gas, but not everyone is immediately spending all that money! It’s so inconceivable that I warned about it and other effects of the oil price crash two months ago: “Wall Street promises a big boost to US GDP,” I wrote. “What have these folks been smoking?”

But even excluding gasoline sales, retail sales were flat last month after edging down 0.2% in December. And sure, some of the savings from gasoline will be spent eventually, but there are plenty of Americans with enough money left over every month to where their spending patterns aren’t influenced by the price of gas.

But this report, an advance estimate that is subject to potentially large revisions, covers only spending at retailers and restaurants, a portion of total consumer spending, which includes healthcare and anything else that consumers pay out of their noses for. And year-over-year, retail sales actually rose 3.3%, with food services sales up 11.3%, auto sales up 10.7% thanks to prodigious subprime financing, while sales at gas stations sagged 23.5%.

So from just the retail sales report, the consumer situation remains murky.

But there is another gauge that is moving deeper and deeper into the red. It has been deteriorating consistently since last summer. A couple of days ago, I reported that wholesale inventories were ballooning in relationship to sales, a red flag in our era when just-in-time delivery and lean inventories have been honed into an art to minimize how much working capital and physical space gets tied up. The crucial inventories-to-sales ratio for wholesalers had reached the highest level since the financial crisis.

Now the Commerce Department released total business sales and inventories for December, which include sales and inventories at retailers, wholesalers, and manufactures – the entire channel. And it’s even worse.

Combined sales by retailers, wholesalers, and manufacturers, adjusted seasonally but not for price changes, dropped 0.9% from November, and was up only 0.9% from December 2013 – not even beating inflation.

Retailers were able to keep their inventories stable in relationship to sales, which inched up 2.6% year-over-year. So the inventories-to-sales ratio remained at 1.43.

Further up the channel, wholesalers saw sales rise only 1.43%, but their inventories stacked up, and the inventories-to-sales ratio hit 1.22, up from 1.16 a year earlier.

And manufactures? That great “manufacturing renaissance” in the US? Year over year, sales declined 0.9%, but inventories rose 2.7%, and their inventories-to-sales ratio jumped to 1.34 from 1.29 a year earlier.

For all three combined, the inventories-to-sales ratio rose to 1.33 in December, after climbing methodically since summer. The last time it was rising to this level was in September 2008 – the Lehman Moment – when sales up the entire channel were beginning to grind to a near halt, a terrible condition that morphed into the Great Recession. That propitious September, the inventories-to-sales reached 1.32, still a smidgen below where it is today:

US-Business-inventories-sales-ratio-2005_2014-Dec

Optimistic merchants and manufacturers expect sales to rise. They plan for it and order accordingly. If sales boom and draw down inventories, the inventories-to-sales ratio remains lean. That’s the rosy scenario. But that hasn’t been happening recently.

In our less rosy reality, sales are not keeping up with expectations, and inventories are piling up. The increase in inventories adds to GDP, and so from that point of view, they beautify the numbers. But from the business point of view, growing inventories caused by lagging sales can turn into a nightmare. And unless sales can somehow be cranked up for all businesses across the entire country to bring down these inventories, orders to suppliers will be trimmed – and that ricochets nastily around the economy with all kinds of unpleasant secondary fireworks.

Price Collapse Hits Scavengers Who Scrape the Bottom of Big Oil’s Barrel

Ultra low producing “nodding donkey”

By Joe Carroll for Bloomberg

In the $1.6 trillion-a-year oil business, there are global titans like Exxon Mobil Corp. (XOM) that wield more economic might than most of the nations on Earth, and scores of wildcatters scouring land and sea for the next treasure troves of crude.

Then there are the strippers. For these canaries in the proverbial coal mine, the journey keeps going deeper and darker.

Strippers are scavengers who make a living by resuscitating once-prolific oil fields to coax as little as a bathtub full of crude a day from each well. Collectively, the strippers operate almost half-a-million oil wells that produced more than 730,000 barrels a day in 2012, the most recent year for which figures were available.

That’s one of every 10 barrels produced in the U.S. — equivalent to the entire output of Qatar, or half the crude Royal Dutch Shell Plc (RDSA), Europe’s largest energy company, pumps worldwide every day. With oil prices down 58 percent since June, these smallest of producers will be the first to succumb to the Great Oil Bust of 2015.

“This is killing us,” said Todd Shulman, a University of Colorado-trained geologist who ran fracking crews in the Rocky Mountains before returning to Vandalia, Illinois, in 1984 to help run the family’s stripper well business.

Todd Shulman stands with his father and sons in May 2006 during the drilling of the C.T. Williams #1, in St. James Field, Fayette County, Illinois.

Stripper wells — an inglorious moniker for 2-inch-wide holes that produce trickles of crude with the aid of iconic pumping machines known as nodding donkeys — were a vital contributor to U.S. oil production long before the shale revolution.

Untapped Well

Though a far cry from the booming shale gushers that have pushed American crude production to the highest in a generation, stripper wells are a defining image of the oil business, scattered throughout rural backwaters abandoned by the world’s oil titans decades ago.

With the price of crude dipping so low, there’s no way Shulman will be able to drill a new well that regulators have already permitted. Nor is he even going to turn on a well finished last month that’s ready to start production.

It would be foolhardy to harvest crude from wells that won’t pay for themselves, said Shulman, who scrapes remnants from old Texaco (CVX) and Shell fields 310 miles south of Chicago, in the heart of what had been a booming oil region in the 1930s. He’ll wait for prices to rebound.

First To Cut

The economics of most stripper wells stop making sense when Brent crude, the benchmark for more than half the world’s oil, drops under $50 a barrel, U.K.-based Wood Mackenzie Ltd. said in a Jan. 9 note to clients.

Brent fell as much as 2.2 percent to $47.78 a barrel in London today, and lost 48 percent of its value for the full year 2014 amid faltering global demand and rising U.S. output that fed a supply glut.

“Once the oil price reaches these levels, producers have a sometimes complex decision to continue producing, losing money on every barrel produced, or to halt production, which will reduce supply,” said Robert Plummer, a corporate research analyst at Wood Mackenzie. “U.S. onshore ultra-low production volume stripper wells could be the first to be cut.”

Although stripper wells extract only a tiny fraction of the oil reaped from a successful shale development, a stripper can be drilled for less than $300,000, compared with $7 million to $9 million for shale wells, which require hydraulic fracturing, or fracking, to flow oil and natural gas.

Done Forever

For stripper-well operators like Shulman and thousands of others across the U.S., the situation is especially dire: unlike shale fields that can be quickly shut down and restarted in response to price swings, stripper operations are geologically and technically delicate.

Shut a stripper well down and chances are the bottom of the hole will fill with water or permanently clog with sand and you’ll never see another barrel of oil, said Brad Gessel, who operates 200 stripper wells in fields formerly owned by the likes of Shell near Whittington, Illinois.

“If you shut it in, you may never get that production back again,” Craig Hedin, a veteran Illinois oil lawyer whose four-decade career included helping negotiate Exxon’s 1989 sale of the sprawling Loudon field in 1989. Loudon was a 400 million-barrel jewel in Exxon’s crown for half a century until output slowed to such a slow gurgle that it was no longer worth the company’s attentions. Now, the 25-mile vein of oil-soaked rock north of Vandalia is being worked by strippers.

Battening Hatches

Before considering the last resort of shutting down producing wells, stripper owners are coping with low prices much like every other oil company. First, they’re suspending new drilling, Gessel said in an office at the back of an industrial showroom stocked with heavy-duty elbow pipes, gauges and other gear sold by the family’s other line of business, Gessel Pump Sales & Service Inc.

The next step is to look for cost-cutting measures in the field and office, and defer new equipment purchases, said the 55-year-old Gessel. Finally, they’d have to lay off employees and Gessel would stop taking a paycheck himself.

It got that bad just 17 years ago.

“When prices crashed and went below $10 a barrel in ’98, I laid off every single employee, my pay went to zero and every piece of equipment was parked in the barn,” Gessel said. “I hope that isn’t where we’re headed this time around.”

All Scavenged

Every drop of crude produced in Illinois comes from stripper wells, rather than conventional wells or shale formations, according to the Interstate Oil and Gas Compact Commission. That’s a higher proportion of stripper-oil supply than any other crude-producing state except Missouri, which also gets 100 percent of its oil from scavenged fields.

The vast majority of Illinois’s oil is fed into Countrymark Cooperative Holding Corp.’s refinery in nearby Mt. Vernon, Indiana.

The price Countrymark, a closely held Indianapolis-based maker of fuel for farmers, pays oil producers averages about $7 a barrel less than the U.S. benchmark, West Texas Intermediate crude. The discount accounts for transportation costs incurred by Countrymark to gather and ship the oil to the refinery by truck and pipe.

That means that last week, when WTI dipped as low as $44.20, Illinois crude fetched less than $38.

“I’m going to try not to lay anybody off because we’ve spent years building a really good workforce,” said Gessel, who started the company with his father and brother in 1980 by kicking in $5,000 apiece. The company now employs 25 workers, including two full-time geologists.

Holding Out

Gessel is betting shale drillers in North Dakota and Texas carrying heavy debt loads and multi-million dollar well costs will fold before stripper operators like him.

Bakken crude, which like Illinois oil trades at a discount to the benchmark to account for shipping costs, fetched $39.97 a barrel on Jan. 13 before rebounding to $43.08 the next day. The price’s 2014 peak was $103.01 in June.

“I maintain the shale stuff has to have a high price to work,” Gessel said. “The Bakken stuff doesn’t work at $35. Hell, even my stuff doesn’t work at $35.”

“Next Time Around The Feds Are Going To Have To Confiscate Stuff”

https://i1.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2014/11/EPS%20growth%20DB%203.jpg

Source: Zero Hedge.  Authored by James H. Kunstler

Events are moving faster than brains now. Isn’t it marvelous that gasoline at the pump is a buck cheaper than it was a year ago? A lot of short-sighted idiots are celebrating, unaware that the low oil price is destroying the capacity to deliver future oil at any price. The shale oil wells in North Dakota and Texas, the Tar Sand operations of Alberta, and the deep-water rigs here and abroad just don’t pencil-out economically at $45-a-barrel. So the shale oil wells that are up-and-running will produce for a year and there will be no new ones drilled when they peter out — which is at least 50 percent the first year and all gone after four years.

Anyway, the financial structure of the shale play was suicidal from the get-go. You finance the drilling and fracking with high-yield “junk bonds,” that is, money borrowed from “investors.” You drill like mad and you produce a lot of oil, but even at $105-a-barrel you can’t make profit, meaning you can’t really pay back the investors who loaned you all that money, a lot of it obtained via Too Big To Fail bank carry-trades, levered-up on ”margin,” which allowed said investors to pretend they were risking more money than they had. And then all those levered-up investments — i.e. bets — get hedged in a ghostly underworld of unregulated derivatives contracts that pretend to act as insurance against bad bets with funny money, but in reality can never pay out because the money is not there (and never was.) And then come the margin calls. Uh Oh….

In short, enjoy the $2.50-a-gallon fill-ups while you can, grasshoppers, because when the current crop of fast-depleting shale oil wells dries up, that will be all she wrote. When all those bonds held up on their skyhook derivative hedges go south, there will be no more financing available for the entire shale oil project. No more high-yield bonds will be issued because the previous issues defaulted. Very few new wells (if any) will be drilled. American oil production will not return to its secondary highs (after the 1970 all-time high) of 2014-15. The wish of American energy independence will be steaming over the horizon on the garbage barge of broken promises. And all, that, of course, is only one part of the story, because there is the social and political fallout to follow.

The table is set for the banquet of consequences. The next chapter in the oil story is more likely to be scarcity rather than just a boomerang back to higher prices. The tipping point for that will come with the inevitable destabilizing of Saudi Arabia, which I believe will happen this year when King Abdullah ibn Abdilaziz, 91, son of Ibn Saud, departs his intensive care throne for the glorious Jannah of virgins and feasts. Speaking of feasts, just imagine how the Islamic State (or ISIS) must be licking its chops at the prospect of sweeping over an Arabia no longer defined as Saudi! The Saudis are so spooked that they announced plans last week for a kind of super Berlin-type wall to be constructed along the northern border with Iraq. But that brings to mind a laughable Maginot Line scenario in which the masked invaders just make an end run around the darn thing. In any case, Saudi Arabia will already be disintegrating internally as competing clans and princes vie for control. And then, what will the US do? Rush in there shock-and-awe style? Bust up the joint? That’ ‘ill make things better, won’t it? (See American Sniper.)

Meanwhile, there will be plenty to contend with state-side. The next time there is a pratfall in the stock and bond markets and the TBTF banks — and there is sure to be — the rescue tricks are liable to be a whole lot more severe than the TARP, ZIRP, and QE hijinks of 2008-2015. Next time around, the federals are going to have to confiscate stuff, break promises, take away things, and rough some people up. The question is how much of this abuse will the public take? I take a certain comfort knowing how heavily armed America is. And not just the lunatic fringe. The thought of Hillary and Jeb out there beating the bushes for big money makes me laugh. They are so not going happen. Just wait. For now, take this MLK holiday break to reflect on the fragility of our own country, and gird your loins for the week to come.