Adam's doing his best to scare the beejezus out of everyone but when is it all going to happen?

I had the pleasure of taking in a couple of hours at a traders expo in London this morning. Among one of the speakers was a gent from a small US oil company that not only had wells but was pumping their own oil fund. Stripping out the sales pitch there were a couple of details that caught my interest

While Adam's dropping the scary scenarios it would be nice to know when it might all happen

He's already highlighted one big trigger, the oil price. This gent today said that his firm and most producers were running at around $20-25 in production costs and if oil fell that low then pumps and wells would start being turned off. He added that at the moment everyone is chasing the rabbit down the hole in selling ahead as fast as possible before prices fall further. That's self defeating in the end never a game that ends well.

The second point he touched on was how the finances works in the industry. Loans to energy companies are mostly subject to what's called redetermination. Every 6 months the lenders assess the loans and credit worthiness of the borrowers and obviously a big emphasis of that is the prices of the commodities produced. The last round of redetermination just passed in October and by and large there's been no major shocks. That doesn't mean that there aren't companies that are close to the wire and will need to restructure. Anglo American is testament to that already happening

The next round of assessments will be run in April and that gives us a key date when things could really turn sour. If oil is down to $30 or lower then that could be when lenders start pulling the plug on financing and the house of cards could come down. Either way we now know some fixed times when any crunch could happen

So keep an eye on two big factors over the next few months

  1. The price of oil
  2. The next redetermination dates

The real trade in all this won't be chasing the oil sector to the bottom, it will be waiting until it blows up and then looking to get in for the long haul when things are at their worst

Waiting for the energy sector to go up in flames