Sol Palha: Financial & Economic Insights The 2020 Oil Crisis Trend & Bond Market Outlook

The 2020 Oil Crisis Trend & Bond Market Outlook

The 2020 Oil Crisis Trend & Bond Market Outlook

The 2020 Oil Crisis

Russia will survive the current oil crisis. This won’t be like the old Soviet Union days when oil at $10 a barrel destroyed the system. Modern Russia is tapped into capital markets. It has dollars. Lots of them. Like $563 billion in international reserves to be exact, second only to China in terms of emerging market central bank funds.

Conservative as ever, Russia is only spending on keeping its working-class safe from the ongoing pandemic emanating from China. As a result of expanding the safety night temporarily, like most countries, Russia will experience a sharp deterioration in government coffers – including a 5.5% primary budget balance deficit.

This year’s outlook will mark a sea change from the 0.8% surplus previously forecasted, BNP Paribas economist Luiz Peixoto, doesn’t see this hurting Russia’s ability to finance its debts. Debt to-GDP there is less than 35% of GDP. Full Story

The 2020 Oil Crisis: Despite Opec Cuts Price Still Slated To Fall?

Oil prices dropped on Friday as traders feared that an Opec deal to slash global supplies by 10% would not offset a historic drop in demand due to the coronavirus outbreak.

The price of Brent crude fell nearly 2.5% to $31.82 per barrel on Friday, despite news that the oil cartel and allies – known as Opec+ – had reached a deal that would end a price war between Saudi Arabia and Russia that threatened to flood the market with more oil than the world could use.

Mexico initially cast some doubt over Opec’s plans, after apparently refusing to sign up to its share of cuts, which would have been 400,000 barrels per day (BPD). The country instead offered to cut 100,000 BPD.

“We commit to ensure that the energy sector continues to make a full, effective contribution to overcoming Covid-19 and powering the subsequent global recovery,” the statement said. Full Story

Options For Major Producers After The  Oil Crisis Subsides

The price of oil has gone negative after weeks of oil sands output selling for less than a pint of beer per barrel. Banks are preparing for a wave of oil bankruptcies by setting up their own oil companies to operate seized assets. Regulators in Texas are considering setting limits on the state’s production, an approach more reminiscent of Soviet-style central planning than a Republican-controlled regulatory body. An oil company executive just admitted, No one wants to give us capital because we have all destroyed capital and created economic waste.”

The industry, at least those companies that survive the downturn, needs to prepare for a very different kind of future, one in which volatility and uncertainty around demand will rule the day.

So what can be done? The industry — at least those companies that survive the downturn — needs to prepare for a very different kind of future, one in which volatility and uncertainty around demand will rule the day, and the only companies that attract capital will be the ones with detailed, specific and ambitious plans for managing the transition, and even pivoting to renewable energy — or for winding down their assets in an orderly way. CNBC

Oil crisis pushing shipping prices up

Now shipping prices are surging to stratospheric levels as the industry runs out of tankers — a sign of just how distorted the market has become.

The spectre of production shut-downs — and the impact they will have on jobs, companies, their banks, and local economies — was one of the reasons that spurred world leaders to join forces to cut production in an orderly way. But as the scale of the crisis dwarfed their efforts, failing to stop prices diving below zero last week, shut-downs are now a reality. It’s the worst-case scenario for producers and refiners.

U.S. drilling activity has nearly halved since January


Before the coronavirus crisis hit, oil companies ran about 650 rigs in the U.S. By Friday, more than 40% of them had stopped working, with only 378 left.

North Dakota, which for years was synonymous with the U.S. shale revolution, is witnessing a rapid retrenchment. Oil producers have already closed more than 6,000 wells, curtailing about 405,000 barrels a day in production, or about 30% of the state’s total.

“I wouldn’t want to get sensational about it but yes, clearly there must be a risk of shut-ins,” Mitch Flegg, the head of North Sea oil company Serica Energy, said in an interview. “In certain parts of the world it is a real and present risk.” Full Story


Now for analysis from day’s gone by 🙂

Oil and Bonds: 2010 Trend



Petrol prices are up 62% from their average low price of 1.61, while crude oil prices are 54% below their old highs. Thus it appears that when crude oil trades back to the 147 mark, petrol prices will most likely be trading at levels in excess of 5 dollars per gallon. If we couple this with the fact that worldwide supplies are dwindling at a rapid rate and that oil companies have drastically slashed their exploration budgets, the long-term projection is for the cost of petrol to reach extremely painful levels.

While we can draw many conclusions from the above charts the main one to focus on is inflation. These charts are clearly indicating that inflation is the next major threat and not deflation as most government economists are projecting. Once again, we would like to warn our subscribers that they should cut down on all levels of debt, use excess money to purchase bullion and commodities-related stocks on all strong pullbacks. The next 3-6 years are going to bring about unprecedented changes.

Bond Outlook

Look at the dramatic turnaround in 30-year rates, from a low of roughly 2.5% in Jan, they spiked to 4.75% and this is occurring when the Fed is keeping short-term rates at close to zero per cent. What do you think will happen when the Feds are forced to raise long-term rates as a result of foreign investors demanding a higher rate of return in order to compensate for the falling dollar? This chart clearly also illustrates that the real estate market is not going to mount a long-term recovery any time soon.

Consider the following facts:

Toll brothers one of the leading home builders reported that its revenues are down approximately 50% for the year. The MBA mortgage applications’ index has fallen over 16% for the week ending May 29; the week before this, it experienced another 14% decline. Mortgage applications have dropped by nearly 50% and the latest figures on the refinancing index indicate that it is down over 24%. Not only are fewer individuals applying for mortgages but banks are making the qualifying process much harder now, thus not everyone that applies gets an approval, unlike in the good old days where you only needed to scratch X on the signature line, and you were approved.

The message is clear avoid the real estate sector.

Logic dictates that interest rates will continue to rise and that the bond market will fall to pieces. In the long run, this is true, but in the short-term, we actually expect rates to drop again and possibly test their lows one more time and bonds will most likely rally and test or take out their old highs before the bond market falls apart. One other long-term negative factor is that America’s biggest debt buyers China and Japan are now deploying less and less money into the bond market, they do not believe (and rightly so) that the US is doing all it can to defend the dollar.


In the next 6-12 months, we are looking for bond prices to rise again (interest rates will drop in the process as they trade in the opposite direction to bond prices) and possibly put in new highs but at the very least they will test their recent highs. For this scenario to remain valid bonds should not trade below 112 for more than 3 days in a row, if they do trade below 112 for more than 3 days in a row, the intermediate outcome will most likely change and instead of rallying to new highs bonds will at the most test the lower limit of their old highs. A break past 126 for more than 5 days in a row will be the first sign that bonds are on their way to at least test their old highs.

Assuming that the current picture remains valid and bonds rally to new highs, the next move will be for bonds to put in a very long-term top and then start their long descent down. We expect this market to slowly break down and eventually a crash, which will eventually drive interest rates to the 15-18% ranges and possibly as high as 25% before the dust settles down.

Those that invested in the bond market should use the upcoming rally to get out of this area for this will be your last chance. If you have a mortgage and you cannot sell the property or do not want to sell the property, then take advantage of the low-interest-rate environment to refinance your mortgage at a fixed rate. Avoid getting into real estate, unless its farmland and make sure you get a good deal on it. Do not rush into anything; the buyer is now in the driver’s seat so negotiate for the best possible deal.

We are expecting the bond market to mount one final rally that should at the very least result in a retest of the old highs if not in a series of 52-week highs.

Where one person shapes their life by precept and example,
there are a thousand who have shaped it by impulse and circumstances.
James Russell Lowell
1819-1891, American Poet, Critic, Editor

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All charts supplied courtesy of,

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