Oil rigged

January 12, 2015 08:51 AM

Falling crude oil prices are taking a big toll on the U.S. oil rig counts, causing the biggest weekly drop in in more than 20 years. The Saudi oil price war is taking on capsulitis and the drop in rig counts could be signaling more problems for the U.S. energy sector as well as the banks and the junk bond markets that lend the drillers money.

The good news is that gasoline prices continue to plunge and it is making the potential economic fallout easier to take. However, with the deflationary pressures building across the globe the economic fallout from the oil price crash may have only just begun. 

Baker Hughes reported that oil rigs declined by a whopping 61 to 1,421. The stunning drop came after 4 weeks of drops and the biggest weekly drop since 1991. This is a worrying number as it appears that investment in the energy sector could be grinding to a halt. The New York Times reported that Junk bonds issued by energy companies are signaling a jarring jump in the number of defaults in the coming months.

Martin S. Fridson, chief investment officer at Lehmann Livian Fridson Advisors, said the yields on energy junk bonds appeared to be predicting that 6% of the bonds would default this year, and even more in 2016. There was one report that exploration and production could cut their 2015 capital spending by 25 to 30 percent in North America after 6 straight years of gains. The U.S. energy boom is under attack and we are seeing job losses already.

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About the Author

Phil Flynn is a senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. Phil is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets.