The Housing Bubble

About what? That oil is going above $100/bbl today?

Or was it in two years? Don’t worry, we’ll call you on it then, too. As well as your Rasmussen poll predictions for the 2016 election.

And when many people were saying the Republican party was dead, I said if they just refused to grant amnesty they would do well in 2014 and they did. The same hold true for 2016, but that means they will not have to do what the chamber of commerce wants and I do not predict that will occur but it might.

Bring-a-Crayon Dan:

I am merely saying that I think oil will overshoot to the low side. Say, you aren’t a (PR) lawyer for an oil company or oil-related company, are you?

Lots of government media consultant liars around the net these days.

“I was right?”

Confucius say: Man who tries to pick bottom, winds up with smelly finger.

Oil Markets
Oil Prices Retreat on Signs OPEC Will Stay Its Course
OPEC Members Defend Refusal to Take Action to Prop Up Prices
Qatar Oil Minister Mohammed bin Saleh Al-Sada, left, Saudi Oil Minister Ali al-Naimi, and United Arab Emirates Energy Minister Suhail bin Mohamed al-Mazroui, right, attend the opening session of the 10th Arab Energy Conference in Abu Dhabi, on Dec. 21.
By Timothy Puko and Georgi Kantchev
Updated Dec. 22, 2014 3:47 p.m. ET

Crude-oil prices slid Monday, the first day of trading after several OPEC members defended their refusal to take drastic action to prop up prices.

Oil officials from several leading members of the Organization of the Petroleum Exporting Countries on Sunday blamed producers outside of the group for the glut that has depressed prices. Oil prices have now fallen by 48% since mid-June as U.S. shale producers battle Saudi Arabia and its Middle Eastern allies for market share.

Light, sweet crude for February delivery settled down $1.87, or 3.3%, to $55.26 a barrel on The New York Mercantile Exchange after rallying earlier in the session by more than a percentage point. The February contract for Brent crude, the global benchmark, ended down $1.27, or 2.1%, to $60.11 a barrel on London’s ICE Futures exchange, after flirting with $63 in morning trade.

“You see a lot of bottom-pickers come in to this market all the time now, so when they get foiled they get out quickly,” said John Kilduff, founding partner of Again Capital in New York, which invests in energy.
…

I am merely saying that I think oil will overshoot to the low side

Already has by at least 15 dollars.

Reminds me of that guy hitting the Titanic’s propeller.

Blech!

It seems like waves of deleveraging could result in more price declines ahead.

Just the opposite it will result in less production and higher prices

They threw everything but the kitchen sink at oil today, Saudi jawboning, spiking the dollar all their MSM tools, however they could not get it below the previous lows. It would take the one thing they actually do not have, real oil that actually can fuel things and not the paper oil on the exchanges.

The IEA was expecting about a million barrels of production per day out of Libya in 2015, guess they need to recalculate. But don’t worry Russia will supply the NG to Italy at a very high price:

BENGHAZI/TRIPOLI, Dec 22 (Reuters) - Fighting between Libya’s competing governments has spread to a third oil port, curbing gas exports to Italy and cutting crude production to less than needed to cover the North African country’s own domestic requirements, officials said. The OPEC producer is struggling with fighting on several fronts as brigades of former rebels who once battled side by side to oust Muammar Gaddafi in 2011 now clash for political power and a share of oil revenues. - See more at: http://www.rigzone.com/news/oil_gas/a/136480/Libya_Fighting_Spreads_to_Third_Oil_Port_11_Killed_in_Benghazi#sthash.chzuPKhP.dpuf

It’s all falling prices. Oil, finished steel, ore, housing.

Remember….“Falling prices of all items is positively bullish and your wallets best friend.”

See also: The ‘I Can’t Breathe’ Profiteers

http://www.bloomberg.com/politics/articles/2014-12-21/the-i-cant-breathe-profiteers

Because social justice can only be achieved when Jesse Jackson’s sons are given the largest Anheuser-Busch distributorship in Chicago

And now for some badge licking, linked from the Drudge Report

“The President should declare a national day of Support for Police. He should send a clear message to all criminals that he appreciates the willingness of officers like Rafael Ramos and Wenjian Liu to sacrifice their lives”

http://time.com/3643286/howard-safir-nypd-shooting/

I’m pretty sure all that stuff has always been standard protocol. Have the police been making arrests that aren’t necessary lately? If so, they should stop.

For instance, they probably shouldn’t have arrested Ray Rices’ then-fiancee after he knocked her out and then dropped her on her face. Seems like some cops are arrest-happy.

For instance, they probably shouldn’t have arrested Ray Rices’ then-fiancee after he knocked her out and then dropped her on her face. Seems like some cops are arrest-happy.

And yet, she still married him. I’ll bet she even apologized to him, for “running into his fist” and getting him into so much trouble.

Don’t make unnecessary arrests should be SOP.

Philosophy got you a lifetime of debt on a rapidly depreciating asset at a grossly inflated price.

Try math next time.

That same philosophy of yours says my chair is a door. Scuse me while I step outside…ooops.

Sheesh, liberals.

Philosophy is clearly neither economics nor accounting. Likewise, rent is not debt, paticularly since it is paid up front each month before housing services are consumed.

By contrast, borrowing a fortune to buy a home just before prices crash is a great way to put yourself in debt and underwater for thirty years to come.

Did you click the Crude Oil Brent link?

When all moms are single poors and their baby daddies are unemployed bums who pay zero taxes, who will foot the bill?

Apparently me, based on how much I paid in taxes last year

Apparently me,

and me…

BTW A-Dan, it got cheaper to drill over the past 5 years. I don’t know if it’s going to get cheaper still.

A friend of mine is involved in fracking as an investor. He noted that it used to take 4 months to drill and frack a well. It now takes 21 days. A lot less time means a lot less money.

I don’t know how low oil can get before drilling stops, but I’m confident that the stoppage of drilling will result in supply shrinking quickly, and prices going up as fast as the well production slows.

My one question (that I don’t have a good answer for) is this:

Can you frack a well, and NOT pull the oil out right away? In other words, if you are a well-heeled oil company, can you drill when labor might be cheap (because everyone has slowed down drilling), but wait to pull out the oil until later, when prices may be higher?

I guess the other alternative is for the more financially strong companies will find ways to store the oil while prices are low. One of my areas of study was decision analysis, and I understand oil companies use lots of decision analysis in their business…the calculators are sure are overheating at this point figuring out where to focus resources.

“BTW A-Dan, it got cheaper to drill over the past 5 years.”

Falling marginal cost of production = supply increase => lower equilibrium price. I certainly get that part of economics!

I explained above about the changing geology, the cost of production is not going down anymore.

Stop harshing on AlbqDan’s imaginary oil price gains.

The oil is there and it will stay there until it is taken out. And in you are going to take it out by fracking then you are going to have to drill a lot of oil wells.

But their ability to lower drilling costs is swamped by the fact that each well is producing significantly less oil. So if they lower the cost of drilling from nine million a well to 8.8 million a well but the production goes from 500 barrels a day to 400 barrels a day the cost per barrel for that production has gone up significantly.

If drilling costs are tied to the cost of infrastructure and this infrastructure can be bought up for pennies on the dollar as a result of bankruptcies then the buyer of this infrastructure that is sold for pennies on the dollar just may be able to profitably extract oil because his infrastructure costs will be low.

“So if they lower the cost of drilling from nine million a well to 8.8 million a well …”

And this is what you think “pennies on the dollar” means? Going from nine million dollars to 8.8 million dollars?

“But their ability to lower drilling costs is swamped by the fact that each well is producing significantly less oil.”

This is why they have to keep on drilling new wells.

You assume that they are going to get steel pipe etc. for pennies on the dollar, that shows that you do not understand the oil patch, they are not going to pull the pipe out of the ground and they will produce the well until it goes dry even in a bankruptcy. There is nothing meaningful to sell off for pennies for the dollar. You are just trying to create a scenario that does not and cannot exist. The best way for the oil companies to avoid bankruptcy is to stop drilling and use their revenue flow to avoid bankruptcy. Even in bankruptcy they will produce and not sell for pennies on the dollars since the trustee must maximize payments to the creditors. They can do that until the oil price recovers which it will since their is virtually no excess capacity in the system. BTW, if you bothered to look at the time of the posts, I posted six minutes before you so there is no way I could be responding to your pennies on the dollar post.

This is why they have to keep on drilling new wells.

That makes no sense, they are losing on each barrel of production and they are going to make it up by volume? No one is going to loan them to money to drill if their cost of production exceeds the revenue from the production.

“That makes no sense, they are losing on each barrel of production and they are going to make it up by volume? No one is going to loan them to money to drill if their cost of production exceeds the revenue from the production.”

This is correct: No one will loan them money if their cost of production exceeds the revenue from the production. And this is why the price for the infrastructure will drop way down and become pennies on the dollar.

Nobody is going to buy up the infrastructure unless he will be able to make a profit from what he buys. And the price he will pay for the infrastructure is the main determinant of whether he is able or not able to make a profit.

This is also why service companies like Halliburton are probably going to do quite well–there will be no shortage of drilling.

“And this is why the price for the infrastructure will drop way down and become pennies on the dollar.”

Yep.

Similar principles explain why a lot of folks who gambled on rental housing prices always going up from now on are positioned to lose a lot of money.

“Even in bankruptcy they will produce and not sell for pennies on the dollars since the trustee must maximize payments to the creditors.”

This part is true, the trustee must maximize payments to the creditors. And to maximize these payments they need to find somebody to take off their hands - to buy up - whatever it is that they need - NEED - to sell. And the price of whatever it is that needs to be sold will be decided by the highest bidder. And this highest bidder is going to set his bid at such a point to where it will benefit him. And this is where the term “pennies on the dollar” come into play.

“And this is why the price for the infrastructure will drop way down and become pennies on the dollar.”

Yep.

If I understand what ADan is saying then I think people are missing something.

Isn’t ADan saying that if a company spends a bunch of money drilling and putting in infrastructure for an oil well, that after the well is dried up the infrastructure, etc. is useless? People would not dig up all the pipe, etc. and try to use it elsewhere.

Also, the owners would essentially pump all of the oil out before the bankruptcy finishes.

So yes, somebody could come along and buy it for pennies on the dollar, but the only value would be the scrap metal. Nobody is going to get a chance to buy it for pennies on the dollar and start producing oil at a much cheaper price (because they got such a deal on the infrastructure).

This is how I understand what he’s saying, but I fully admit I could have it wrong.

“Isn’t ADan saying that if a company spends a bunch of money drilling and putting in infrastructure for an oil well, that after the well is dried up the infrastructure, etc. is useless? People would not dig up all the pipe, etc. and try to use it elsewhere.”

This may be what he is saying but it’s not what I am saying.

What I am saying is that drilling an oil well may be very unprofitable if the cost of the necessary infrastructure is expensive but it may be profitable if the cost of the necessary infrastructure is cheap.

If the price of oil drops to a point where a lot of bankruptcies are triggered then what the oil industry is going to end up with is a lot of cheap oil drilling infrastructure, and this cheap oil drilling infrastructure will drop the expense of drilling oil wells.

And since most of the expense of production of a fracted oil well is directly related to the drilling costs (because a lot of holes have to be drilled) then the expense of production will drop as the drilling costs drop.

They will sell the land and equipment on Auction dot com, and there will still be oil in the ground at the time.

You are clueless.

So yes, somebody could come along and buy it for pennies on the dollar, but the only value would be the scrap metal. Nobody is going to get a chance to buy it for pennies on the dollar and start producing oil at a much cheaper price (because they got such a deal on the infrastructure).

This is how I understand what he’s saying, but I fully admit I could have it wrong.

No, Viking that is exactly what I am saying.

ADan- One point to consider. I think a lot of money was used to purchase land in anticipation of drilling on that land. AND, debt was used in many cases to acquire that land.

So, if oil prices stay low enough for long enough, it may very well be possible for someone with deep pockets to acquire the debt used to buy that land for a very nice discount indeed. The question is “who”?? My money would be on a big player with strong balance sheet…or big PE fund.

At the end of the day, if they can acquire the land inexpensively enough in the aftermath of this oil price collapse, then it could change the economics of drilling for those particular parcels of land.

“So yes, somebody could come along and buy it for pennies on the dollar, but the only value would be the scrap metal.”

Why do you say the only value would be the scrap metal?

Are you suggesting that the price it goes for somehow affects its utility value?

ADan- One point to consider. I think a lot of money was used to purchase land in anticipation of drilling on that land. AND, debt was used in many cases to acquire that land

It is very rare for an oil company to buy land. They lease the mineral rights with most of the payments being a royalty on the oil produced. Since the primary term is for a very short period, there will not be a lot of value there if the price of oil is far below the cost of drilling the well and production costs. I once paid 1200 a year for an area that had about ten million barrels of oil when the price was about ten dollars a barrel and the oil was far more expensive to produce than that.

“At the end of the day, if they can acquire the land inexpensively enough in the aftermath of this oil price collapse, then it could change the economics of drilling for those particular parcels of land.”

“inexpensively enough” often results when enormous amounts of burdensome debt goes poof.

“inexpensively enough” often results when what was once highly-priced, highly-in-demand infrastructure takes a dive in price because the previous high demand for it makes a sudden U-turn.

“I once paid 1200 a year for an area that had about ten million barrels of oil when the price was about ten dollars a barrel and the oil was far more expensive to produce than that.”

And you did this because …?

If you cannot figure that out, you know nothing about the buying and selling of oil leases. This was around 1999 and I knew just like today the “worthless” lease was going to appreciate and it did.

ADan:

OK, so if the oil company stops leasing the land, what happens to the value of the land and the oil underneath? Does the landlord ask for higher rent from the next driller?

Oh I figured it out alright. You bought it when it was out of favor. And because it was out of favor when you bought it you got it for a good price.

OK, so if the oil company stops leasing the land, what happens to the value of the land and the oil underneath? Does the landlord ask for higher rent from the next driller?

I suppose people could ask for higher rent but it is just like HA says about an old truck, you can ask for $50,000 but that does not mean you will get it. If an oil company has left a property, it usually means the next oil company will pay less particularly if the previous oil company spent any money on assessing the area since they obviously left because they did not see any value. If they just stop paying in a bankruptcy it means the area is worthless at least at anticipated prices.

How does bankruptcy affect leases?

Under the law a lease is both a property interest and a contract. A bankruptcy judge has the power to allow someone out of a contract if that contract has no value to the bankruptcy estate. So if an oil company goes bankrupt the bankruptcy trustee will try to sell the oil lease to raise money for the estate, but if the anticipated price of oil is so low that the payments under the lease are more than the lease is worth, the estate will just be released from the contract.

As far as operating wells they will be allowed to operate until the actual cost of marginal production is more than the revenue to maximize return to the creditors (Mr. Banker, probably). This is why I say above there will be no meaningful pennies on the dollar sales if the oil company goes bankrupt that will allow these wells to produce at today’s prices.

What collateral does the bank receive in exchange for lending the money for the oil company to procure this “lease”?