February 26th, 2015
The collapse in oil prices has created a ticking time bomb in the energy markets.
You see, fueled by the market’s easy money policies, a big portion of the expansion in the energy markets has been financed with high-risk “junk” bonds.
According to the latest estimates, energy-related issuances now account for almost 15% of the total $1.4 trillion junk-bond market. That’s roughly $210 billion in high-risk debt.
As you might have guessed, the vast majority of these high-yield bonds were used to fund oil and gas deals.
Now a wave of credit rating downgrades is hitting the sector as oil prices reset at lower levels.
That has created a dangerous environment for both oil companies and bond investors…
February 24th, 2015
As oil prices inch forward, there’s an inevitable consequence of lower prices building that will help them climb even higher.
It’s called the “reserve crunch.”
Faced with significantly lower oil prices, the replenishment of oil reserves is beginning to take a massive hit.
In fact, Royal Dutch Shell (NYSE: RDS-A) recently reported that it had replaced just 25% of its 2014 production. That’s just 300 million barrels of new reserves to replace 1.2 billion barrels of production.
Now you know why I call it a “crunch.” It’s yet another sign of shrinking future production.
Shell isn’t the only one. Other operators large and small have begun to issue similar statements.
Now in today’s environment of surpluses, it’s hardly surprising that forward-looking production may take a hit. After all, there’s very little reason to continue producing excessive amounts of crude if it’s merely going to depress the price.
But this is the kind of crunch that promises to have a big impact on both crude oil prices and stock valuations…