The drop in oil prices could be the “straw that pops the $7-trillion derivative bubble.”
Can you explain the influence of oil prices on derivatives?
It’s not the oil prices that are significant; it’s the change in oil prices. If you own an oil field and it costs you $75 to produce a barrel, at $110 a barrel ($110/bbl), you’re OK. If oil drops to $45/bbl, you’re in serious trouble.
In the shale oil sector, producers were taking out hundreds of billions of dollars in loans to finance shale oil that was costing them about $110/bbl to produce. It looked good on paper, but was a disaster waiting to happen. A lot of people in the shale oil business will soon be going out of business.
This could start World War III. The United States is the biggest oil producer in the world today, and Russia is number two. Russia’s economy is based on oil priced at $110/bbl. They are very angry at the U.S. and Saudi Arabia for the games that have been played in oil. Oil at $45/bbl is not sustainable. It could bring down the world’s financial system all by itself.
Oil prices fluctuated up and down over the course of this week, with a wider gulf opening up between WTI and Brent crude. The U.S. Energy Information Administration reported higher than expected inventories for the week ending on February 13, jumping by 7.7 million barrels. The figures continue to astonish – even as rigs drop at a surreal pace, down 30 percent since October, production continues at elevated levels.