The Real Reason For the Oil Crash… And Why It Could Happen In Other Asset Classes

It looks like Oil’s bounce is over.

Traders have been playing for a rise in Oil based on two things:

1)   Oil being sharply oversold due to its 60% collapse in the span of six months.

2)   We’re heading into “drive season” (the summer) in which gas demand increases.

This has seen Oil surge 45% since its March 2015 bottom.

However, the larger story for Oil, like all things, concerns the US Dollar. Below is a chart showing Oil against an inverted chart of the US Dollar chart (so if the US Dollar strengthens, the blue line falls).

You can note the close correlation between the two:

It is not coincidence that Oil bottomed the very same day that the Us Dollar peaked and began to correct. Oil exploration is an extremely capital intensive business: drilling a new Oil well costs at a minimum ~$4 million… and can easily run up into the $100+ million range.

Unless it has a multi-billionaire for a backer… any Oil exploration company will issue debt to drill. This debt is denominated in US Dollars. When you borrow in US Dollars you are effectively shorting US Dollars.

When the US Dollar rally starting in July 2014 this forced the price of Oil down… which in turn made many new Oil projects uneconomical… which lead to Oil companies going bust and defaulting on their debt.

And so the US Dollar carry trade took down Oil.

With that in mind, consider the price of Oil against the recent strength in the US Dollar:

Oil has a ways to catch up… and if the US Dollar continues to strengthen, (remember the above chart for the US Dollar is inverted, so if the US Dollar strengthens, the blue line falls) Oil will collapse.

This is jut one small part of the massive $9 trillion in US Dollars that has been borrowed and invested elsewhere. To put this number into perspective, it’s larger than the economies of Germany and Japan combined.

The US Dollar bull market is not over… Indeed, if the US Dollar carry trade really begins to blow up… we could see another Crisis that would be even worse than 2008.

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About the Author: Tyler Durden

31 Comments

  1. If your answer to my question is that there are ZERO options, then you’ll never get anywhere in life.

  2. Please cite one post of yours which I have twisted. If you cannot even accomplish that simple task, then I have assume that you are only blowing smoke, as you did when you claimed to be a published economist yet could not provide one shred of evidence of anything or yours being published other than the tantrums that you regularly toss around here.

  3. WHICH ONES HAVE YOU NOT TWISTED??? BUT BEING A RIGHT WINGER, YOU PROBABLY DO THIS ALL THE TIME… TO EVERYONE… WITHOUT EVEN NOTICING THAT YOU ARE DOING SO!!! SORT OF LIKE YOU BEING AN ARROGANT SELF CENTERED TWIT WITHOUT EVEN REALIZING IT!!!

  4. PLEASE EXPLAIN HOW… AND WHY… YOU TWIST ALL OF MY COMMENTS INTO SOMETHING THEY ARE NOT!!! NOT THAT YOU ARE THE ONLY RIGHT WINGER WHO DOES THAT SORT OF THING!!!

  5. AND GOLD STARS IS NOT REALLY DEAD… HE JUST SEEMS TO BEBECAUSE HIS THINKING…. IF YOU WANT TO CALL IT THAT… IS SO BRAIN DEAD!!! OR MAYBE HIS BRAIN LEFT FOR BETTER ACCOMODATIONS… AND DID NOT LEAVE A FORWARDING ADDRESS! HIS BRAIN WOULD NOT WANT TO GET A RETURN TO SENDER NOTIFICATION, NO DOUBT!

  6. You mentioned those papers because you like giving yourself standing ovations. FYI, unless you support claims like this, you simply look like another blowhard, anonymously living out the life that you wanted but never had. I could claim to be the guy that has stretched Nancy Pelosi’s skin from her kneecaps to her forehead: this does not make it true.

  7. Poor dilly, still delusional about having a mother!
    She is not really dead, just left with no forwarding address. 🙂

  8. MOM DIED ABOUT 60 YEARS AGO… NOT SURE EXACTLY WHEN, BECAUSE SHE LEFT TOWN WHEN I WAS ABOUT A YEAR OLD. BUT APPARENTLY YOU KNOW A LOT ABOUT LIVING IN YOUR MOMS BASEMENT AND NEEDING MEDICATIONS TO KEEP YOUR SANITY INTACT. WE CAN WONDER WHY YOU KNOW SO MUCH ABOUT THAT…. EXTENSIVE PERSONAL EXPERIENCE, WE CAN SAFELY ASSUME!!!

  9. WHATEVER! I ONLY MENTIONED WRITING THOSE PAPERS BECAUSE I THOUGHT IT MIGHT HELP READERS UNDERSTAND THAT I KNOW WHAT I AM TALKING ABOUT. I AM NOT JUST SOME RIGHT WING REPUBLICAN WHO SPEWS THEIR IGNORANCE AND MAKES UP WHATEVER FACTS THEY CONVENIENTLY NEED AT THE MOMENT TO CONVINCE THEIR BRAIN WASHED BUDDIES THAT REPUBLICANS ARE RIGHT… ABOUT MUCH OF ANYTHING. I KNOW BETTER, BECAUSE I HAVE STUDIED THE ACTUAL DATA FOR DECADES. AND THE DATA TELL ME… VERY CLEARLY… THAT REPUBLICAN ECONOMIC POLICIES ARE DANGEROUS AND HARMFUL TO THIS COUNTRY…. AND THE TRENDS OVER THE PAST 15 YEARS SHOWS THAT THE CHICKENS HAVE COME HOME TO ROOST… REPUIBLICANS REALLY AND TRULY HAVE DESTROYED SOME VERY IMPORTANT COMPONENTS OF THE US ECONOMIC SYSTEM… AND SOCIAL AND POLITICAL SYSTEMS AS A RESULT!!!

  10. WHAT WERE THEY… OR ANYONE ELSE.. SUPPOSED TO DO??? GO TO THEIR DIRT POOR RELATIVES AND BORROW A FEW BUCKS TO START UP A BUSINESS…. MOWING LAWNS??? OR MAYBE… LOOKING AROUND FOR A PUSHER AND BUY A LITTLE BIT OF DRUGS AND MAKE A FEW BUCKS SELLING THE STUFF WITH A LITTLE MARK UP??? OR IF THEY WERE REASONABLY GOOD LOOKING WOMEN… MAYBE RENT OUT THEIR BODIES FOR A FEW BUCKS AN HOUR??? YOU REPUBLICANS NEVER CEASE TO AMAZE ME WITH YOUR ARROGANCE AND SELF CENTERED OUTLOOK ON LIFE!!! TH VAST MAJORITY OF PEOPLE ARE LOW INCOME BECAUSE THEY HAVE NO REAL OPTIONS… NONE… ZERO… ZILCH!!! THEY CAN WORK FOR SOME JERK FOR PEANUTS OR THEY CAN…. STARVE ON THE STREETS… OR CRAWL ON THEIR HANDS AND KNEES TO THE LOCAL GOVERNMENT OFFICE AND BEG FOR FOOD STAMPS… AND MAYBE WELFARE IF THEY ARE WOMEN WITH KIDS!!! IT TAKES MONEY TO MAKE MONEY…. IF YOU HAVE ACCESS TO MONEY… YOU CAN DO JUST ABOUT ANY DAMN THING YOU WANT? IF NOT… FORGET IT…. YOU WILL WORK FOR NOTHING TO MAKE SOME OTHER AHOLE RICH. OR YOU WILL LIVE IN POVERTY. THOSE ARE YOUR OPTIONS… PERIOD!!!!

  11. Must be why dilly is so wealthy this is all beneath him!
    All those risks of starting a business and all! 🙂
    Why I bet he is the wealthiest person in his World of Warcraft group! 🙂

  12. As you can see, dilly boy is just off his meds and living in his mom’s basement. LOL
    He would not know “economy” if it was chewing his leg off!!

  13. Thanks for admitting that your “published paper” were nothing but another instance of you making stuff up in attempt to pat yourself on the back. But I’m sure that your fan letters really rattled some cages.

  14. and of those ‘hundreds’ of different people, how many “worked like dogs” to change their own situation? ie. find a better job, start their own business, or enhance their own education/skills? and how many instead did nothing while complaining about their jobs/pay/life and blaming everyone else?

  15. may i suggest to save / copy before posting
    [ save even to a folder for such on your desk top ]
    [ and yearly save this folder to a disc ]
    I too have run into lost and or denied postings here
    AND YES IT IS FRUSTRATING
    save to a file folder
    then you can rephrase and edit [ and save again ]
    rather then raging at the person u r responding to
    or all [ as it seems at times]
    remember , we are all people that have to live together on this trip [ and u all reading this – applies to u 2 ]

  16. To John Dillie
    AAAAAHHHHHHHHHHHHHHHHHHh
    you obviously do know facts and have some true corralilational truths
    BUT
    you drive me crazy with your failure to answer some peoples questions
    AND
    calling us who dis agree with some [ and yes others with all ] REPUBLICANS
    You must understand that not even democrats would agree with all you say
    I am just tired of you saying we need social justice [ we do]
    but dis agreeing with a way to get there !!!! WITH OUT A DISCUSSION !!
    YOU are not perfect [ and neither am I ] [or others]
    BUT
    debt is not the way as the USA gov is doing
    ie
    military / industrial complex
    OR/ and
    to much welfare economics
    People [especially able body ] should work for GOD , themselves , their families And society [ society as a whole – orphans, widows , truly handicapped ]

    I will not go negative here

  17. I WROTE AN EXTENSIVE AND SOMEWHAT DETAILED RESPONSE TO YOUR QUERY. BUT NOW THAT YOU MENTION IT, I CANNOT FIND THAT RESPONSE ANYWHERE ON THE FORUM, OTHERWISE I WOULD SIMPLY COPY AND PASTE THAT RESPONSE HERE. THAT SEEMS TO HAPPEN A LOT. I GUESS MY LIBERAL OPINIONS TICKS OFF THE RIGHT WINGERS WHO APPARENTLY OVERSEE THIS BOARD. THEY FREQUENTLY CENSOR MY STUFF. I TRY TO POST A LOT OF STUFF THAT WILL NOT POST. AND MANY POSTS SIMPLY DISAPPEAR VERY SOON AFTER I POST IT! WOULD RIGHT WINGERS CENSOR PEOPLE THEY DO NOT AGREE WITH??? ABSOLUTELY, YES… THEY DO IT ALL THE TIME!!! IF YOU WANT ME TO ANSWER YOUR QUESTION ABOUT FUKUSHIMA, AGAIN, I WILL DO SO… BUT THE RESPONSE WILL NOT LIKELY BE AS CLEAR AS THE FIRST RESPONSE… IT WAS A MINOR MASTERPIECE BECAUSE I AM A BIT PASSIONATE ABOUT NUCLEAR STUFF!!!

  18. WHO DID NEARLY ALL OF THE ACTUAL WORK??? OH YEAH… THE PEONS WHO SHOWED UP EVERYDAY AND GRUNTED AND SWEATED AND LABORED ON AND ON AND ON IN TOTAL TEDIUM DID THE WORK…. PRETTY MUCH ALL OF IT!!! THE WALTON CLAN EXEMPLIFIES THIS REALITY VERY WELL… THE 6 RICHEST WALTONS ON THE FORBES LIST OF RICHEST PEOPLE… ALL BILLIONAIRES… SHOWS THAT THOSE 6 PEOPLE ARE AT LEAST 10 TO 20 TIMES RICHER THAN ALL OF THEIR MORE THAN 2 MILLION EMPLOYEES… COMBINED!!! AND I WOUD SUSPECT THAT TENS OF THOUSANDS OF THOSE EMPLOYEES EACH DO MORE WORK ON A TYPICAL AVERAGE DAY THAN ALL THE WALTONS COMBINED DO IN AN ENTIRE MONTH…. UNLESS YOU CONSIDER CASHING GIANT DIVIDEND CHECKS TO BE HARD WORK! THE OLD MAN DESERVED TO GET RICH… BUT EACH ONE OF HIS FOR RICHEST HEIRS ARE NOW WORTH AT LEAST TEN TIMES WHAT HE WAS EVER WORTH… AND IT IS HIGHLY LIKELY THAT MONTHS AND EVEN YEARS PASS BETWEEN THE TIMES WHEN ANY WALTON BILLIONAIRE EVEN GOES INTO A WAL MART… MUCH LESS ACTUALLY DOES ANY WORK THERE!!! WE CAOULD SAY THE SAME THING ABOUT ALMOSTY ANY COMPANY. IN 40 YEARS OF WORKING FOR SOME OF THE LARGEST CORPORATIONS IN AMERICA, I NEVER ONCE SAW EVEN ONE OF THE TOP EXECUTIVES OR TOP STOCK OR BONDHOLDERS…. BUT I SAW HUNDREDS OF MOSTLY HARD WORKING PEOPLE EVERY SINGLE DAY…RAIN OR SHINE! I HAVE WORKED SIDE BY SIDE WITH HUNDREDS OF DIFFERENT PEOPLE WHO COULD WORK CIRCLES AROUND ANY BILLIONAIRE ON THE PLANET… AND MOST OF THOSE HARD WORKING PEOPLE WERE JUST LIKE ME… WORKING LIKE DOGS… BUT WERE STRUGGLING JUST TO PAY FOR THE BASICS IN LIFE BECAUSE THEIR PAY WAS TOO LOW! YOU REPUBLICANS CALL THIS WORKING FOR A LIVING… DEMOCRATS AND OTHER HONEST PEOPLE CALL IT MODERN SLAVERY!!!

  19. Realist, was a little rough on you yesterday, by asking you to answer 7 questions truthfully and I understand totally how confusing the whole situation would of been for you, but I only asked you one question and you didn’t even reply back.

    My question was about Fukushima, because you mentioned that you had worked in the Nuclear Field.
    Now I’m beginning to think the meaning of Nuclear Field to you is, new cleared fields.

  20. NO. AS A MATTER OF FACT, MOST OF THOSE LETTERS WERE TO REPUBLICANS WHOSE OPINIONS AND POLICIES I DISAGREED WITH… SOMETIMES VERY STRONGLY. MY LETTER BLASTING SENATOR MCLURE FOR TRYING TO PRIVATIZE SOCIAL SECURITY WAS ESPECIALLY SCATHING!

  21. LET REPUBLICANS GET THEIR HANDS ON ENOUGH ECONOMIC POWER, AND IT WILL NO LONGER BE THE CLEANEST SHIRT IN THE BASKET. IN FACT, THAT SHIRT MAY BE REDUCED TO RAGS IN SHORT ORDER!!! BUT, NO DOUBT A LOT OF RICH REPUBLICANS WILL GET EVEN RICHER BECAUSE OF THOSE EFFORTS… AND ABSOLUTELY, THE DAMAGE WILL BE BLAMED ON DEMOCRATS!!!

  22. GREAT THINGS WILL HAPPEN… BUT NOT NECESSARILY FOR YOU! UNLESS YOU DO WISE THINGS WITH YOUR BORROWED MONIES!

  23. So I think I finally understand you… Correct me where I’m wrong here, but from what you just said (AND THEY ESPECIALLY HATE LIBERALS WHO WANT TO SPREAD SOME OF THAT ECONOMIC WEALTH AROUND TO THE PEOPLE WHO ACTUALLY DO ALL THE WORK TO EARN IT!!!) …

    you believe that when someone takes a risk to create a business, spends years and years to build that business up, hires others to do some physical (or other trivial) work at minimum or somewhat above minimum wage, and ends up creating a successful business …. that it is those laborers, not the business owner, that deserves all the credit for creating said wealth.

  24. Oh, and on the forum at yesterday’s article, you yapped about being a highly respected and published economist. Yet when several of us pressed you as to where we could find these publications, you filibustered yourself silly in an attempt to avoid answering the question. Time to come clean. These economic papers were really nothing more than fan letters to your favorite bureaucrats, weren’t they?

  25. So, according to your theory, if I keep using my credit cards until I exceed my limit, great economic things will happen in my life?

  26. When you borrow in US Dollars you are effectively shorting US Dollars….. .This is jut one small part of the massive $9 trillion in US Dollars that has been borrowed and invested elsewhere. To put this number into perspective, it’s larger than the economies of Germany and Japan combined. TECHNICALLY, ALL THIS IS TRUE. HOWEVER, LETS NOT FORGET THAT TOTAL DEBT IN THE USA IS AT LEAST 120 TRILLION, AND AT LEAST DOUBLE THAT WORLD WIDE, MUCH OF IT BORROWED IN US DOLLARS. IF EVERYONE IS SHORTING DOLLARS…. WHY DOES THE DOLLAR JUST KEEP GETTING STRONGER??? OH, YEAH… ITS BECAUSE INCREASED DEBT MEANS INCREASED ECONOMIC ACTIVITY WHICH USUALLY MEANS STRONG ECONOMIC GROWTH…. WHICH MEANS THE USA IS JUST GETTING MORE AND MORE PROSPEROUS WHEN BORROWERS BORROW AT CURRENTLY LOW INTEREST RATES…. AND EITHER USE THAT MONEY TO INVEST IN NEW PROJECTS… OR TO ROLL OVER HIGHER INTEREST DEBT. THE US DOLLAR IS RISING BECAUSE AMERICA IS DOING VERY WELL ECONOMICALLY! RIGHT WINGERS SEEM TO HATE THAT…. AND THEY ESPECIALLY HATE LIBERALS WHO WANT TO SPREAD SOME OF THAT ECONOMIC WEALTH AROUND TO THE PEOPLE WHO ACTUALLY DO ALL THE WORK TO EARN IT!!!

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