Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Silver As Strategic Metal: Why Its Price Will Soar - 21st Jan 18
Stocks, Gold and Interest Rates Three Amigos Ride On - 21st Jan 18
Why Sometimes, "Beating the S&P 500" Isn't Good Enough - 21st Jan 18
Bunnies and Geckos of Sheffield Street Tree Fellings Protests Explained - 21st Jan 18
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18
How to Know If This Stock Market Rally Will Continue for Two More Months? - 14th Jan 18
Everything SMIGGLE from Pencil Cases to Water Bottles, Pens and Springs! - 14th Jan 18
Land Rover Discovery Sport Very Bad MPG Fuel Economy! Real Owner's Review - 14th Jan 18
Gold Miners’ Status Updated - 13th Jan 18
Gold And Silver – Review of Annual, Qrtly, Monthly, Weekly Charts. Reality v Sentiment - 13th Jan 18
Gold GLD ETF Update.. Bear Market Reversal Watch - 13th Jan 18
Stock Market Leadership In 2018 To Come From Oil & Gas - 13th Jan 18
Stock Market Primed for a Reversal - 13th Jan 18
Live Trading Webinar: Discover 3 High-Confidence Trade Set-Ups - 13th Jan 18
Optimum Entry Point for Gold and Silver Stocks - 12th Jan 18
Stock Selloffs Great for Gold - 12th Jan 18
These 3 Facts Show Gold Is Set to Surge in 2018 - 12th Jan 18
How China is Locking Up Critical Resources in the US’s Own Backyard - 12th Jan 18
Stock futures are struggling. May reverse Today - 12th Jan 18
Three Surprising Places You See Cryptocurrency - 12th Jan 18
Semi Seconductor Stocks Canary Still Chirping, But He’s Gonna Croak in 2018 - 12th Jan 18
Land Rover Discovery Sport Panoramic Sunroof Questions Answered - 12th Jan 18
Information About Trading With Alpari And Its Advantages - 12th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

What China’s Surprise Announcement Means for Crude Oil

Commodities / Crude Oil Aug 12, 2015 - 08:55 PM GMT

By: ...

Commodities

MoneyMorning.com Dr. Kent Moors writes: The People’s Bank of China (PBOC) just decided to cut the value of the Chinese currency, the yuan, by 2%.

The announcement took analysts by surprise and signaled that Beijing has decided to shore up a weakness in exports. It will now almost certainly usher in similar moves by other Asian countries that are China’s exporting competitors.

And behind that cut U.S. oil and gas producers face another painful period.


Technically, the PBOC move amounted to a change in the way the central bank calculated the value of the yuan against the U.S. dollar by revising the way in which the daily midpoint is determined. Now it will result from market makers’ quotes and the previous day’s closing price.

The result was a decline of 2% in the yuan’s exchange value and the largest one-day drop in the currency’s value against the dollar ever recorded. The previous record was a less than 1% decline in December 2008, the intense period in the global credit crunch. The yuan’s exchange value is now at a level last seen three years ago.

Here’s what this means for the price of oil…

Why a Cheaper Yuan Is Putting Pressure on Oil Prices

Making one’s currency cheaper against major outside trading currencies effectively reduces the price of exported goods since they are now produced by cheaper domestic payments that allow outsiders using hard currency to reduce their payments for what is produced.

More broadly for oil this is seen as a sign of further weakening in Chinese industrial demand for energy. That prognosis may be a bit premature (since there will be no figures to sustain a judgment either way for at least three months), but nonetheless it will feed into the current market’s penchant for overreacting emotionally to each new development.

Coming on the heels of major declines on Chinese stock exchanges, pundits will now bang the drums for a Chinese-led restraint on oil prices.

Yet all this means is that Chinese authorities have actually lowered artificial manipulation practices with the nation’s currency, moving closer to allowing the foreign exchange market to determine the actual value of the yuan.

The direct connect between Chinese export and energy needs has always been a debatable issue. There is no doubt that industry in general is a heavy user of imported oil, and a decline in production for export would have an impact on oil imports into China.

However, it is the rising domestic market that will be fueling the brunt of oil needs moving forward. It is here that the perceived decline in domestic economic expansion looms.

Why a Chinese Slowdown Isn’t Bad News for Energy Markets

Yet even here the pundits are overreacting. A continued Chinese 7% annualized expansion rate is neither realistic nor desirable. The dislocation and inflationary pressures incumbent on such an overheated environment are counterproductive. As long as there had been domestic slack to absorb the expansionary pressures, it could be discounted.

But these days moving the expansion “down” to 5 or 5.5% actually provides greater stability – for both the rapidly accelerating Chinese middle class and the more market-oriented currency.

Nonetheless, expect the ripples from last evening’s yuan devaluation to be the topic of hotly contested conversation on commodity prices over the next few days.

How the Rising Cost of Debt Is Hurting U.S. Oil Producers

The more serious effect on the American oil and gas producing sector will be coming from further deterioration in the energy debt market.

This is a matter we have discussed here in OEI on several earlier occasions. Most U.S. producers have been “cash poor” for much of the past decade. That refers to their operations costing more than the proceeds of production.

In normal pricing environments for oil and gas, this does not mean very much. Debt could easily be rolled forward to cover capital expenditures, while cash in hand could be reserved for benefits to shareholders (dividends, share buyback programs, etc.).

However, today the situation is very different. Energy debt comprises the highest stratum of what is termed “high yield debt.” This is not investment grade and is usually referred to as “junk bonds.” The yields are higher because the risk is worsening.

Here’s the rising problem in a nutshell.

The spread between investment grade and junk bonds has been widening, with an additional premium being required for the highest risk associated with energy. Today, new rollover bonds are requiring annualized interest payments of almost 14%. That rate will increase as we move into the third quarter.

In addition, banks will be restructuring debt portfolios by October and again toward the end of the first quarter in 2016. On both occasions, energy debt will become even more expensive.

A return to $70 a barrel oil prices and $4 per 1,000 cubic feet for natural gas would change the picture considerably. But neither is likely until the end of this year or into 2016. The debt picture will be getting worse before it evens out.

And that means the cycle of smaller company liquidations and broader M&A activity will intensify.

That’s bad news for some vulnerable companies but good news for us.

There will be a fire sale involving choice wells, drilling locations, and leases.

And we will have some nice pickings in an exceptionally oversold sector. I’ll keep you posted.

Source :http://oilandenergyinvestor.com/2015/08/what-chinas-surprise-announcement-means-for-oil/

Money Morning/The Money Map Report

©2015 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules