2014 began with an intense implosion of overpriced tech stocks that destabilized players and set us up for nasty knock off effects. Months afterwards, energy names began to turn downward and started an at first slow descent; a black omen for anyone looking for a forward indicator.
Saudi Arabia decided to play the world’s worst move (effectively maiming OPEC), spiked the oil markets when they could least handle it, and sent oil into the abyss touching off a second massive sector implosion in oil and gas names. But not just oil & gas, as the market became terrified of economic stagnation led by fears out of Europe and Asia, and the entire energy sector followed oil down the hole.
We are now experiencing what I view as the third wave of the same phenomenon that began in early 2014, more than a year later, as the entire stock market collapses 10% in a short span of time, led by China’s markets and the intensely poor decision making of a command/control economy trying to have their cake and eat it too.
That being said, I haven’t yet seen any indication that the real economy is retracting.
Job growth seems present and in my own local markets where I have a good ear to the ground concerning hiring and pay policies, I am actually hearing talk of wage hikes. The last five years, our local job market at least was terrified of the HR monsters that were federal regulations (chiefly PPACA), not to mention we are still reeling from 2009 in some respects. But I think as we clear away from the implementation of these federal regulations, especially with rigid conservatives now holding fast against, we are going to start to see some wage growth. Employees are actually demanding it now, voting with their feet when they can.
This should do wonders for the economy.
With regards to oil specifically (which is chiefest of my concerns) the EIA is suggesting that the current imbalance between consumption and production of oil is 2 million barrels per day. This is the cause of our stockpiling and the foremost reason oil has sunk so far. Saudi Arabia’s move to curtail US production has been a failure and so far the long feared wave of insolvencies has held to a slow drip, even from the most precarious of businesses.
A 2 million barrel imbalance is not all that bad and I believe that, barring some sort of real demand destruction, we’ll just float along at these levels until the market becomes more comfortable with oversupply. I don’t think oversupply necessarily will force pricing lower as it would take a very specific set of circumstances which include not having a merger & acquisition brokerage occur. Yet we see M&A activity is very healthy in this current time period and I have to believe that if oil goes much lower you would see US markets consolidate aggressively.
Besides this, the global imbalance is equivalent to about one major oil producer globally. And in this current environment, we also should be aware that civil unrest is a powerful destabilizer of oil production (via civil war) with positive likelihood.
Sources of new supply are questionable. New well development at these oil prices are unprofitable and only large state sponsored development is probable. Yet, economic weakness is harming state budgets and may make it difficult to attain approval for unprofitable ventures. The largest foreign state controlled sources of oil are also some of the most sensitive to this oil price shock.
Altogether, I continue to believe that the most likely outcome in oil markets is unknowable yet still predictable production locations going offline from internal unrest. Venezuela is pegged as the most likely location for such an event, do to the extreme nature of their current state of affairs, and because their leadership is proven incapable of handling the situation. But Venezuela is hardly the only candidate; just the best.
Outside of that, the economic uncertainty that hit everyone’s radar earlier this summer is now coming back under control. Bond yields continue to subside across all major foreign issuers, and I would not be surprised if the EU crisis in particular remains hidden from view for another full two years.
Domestically, I expect monetary policy to remain accommodating, but would not be surprised if Yellen raises interest rates some token amount, to try and claim some victory for the Federal Reserve. I cannot expect how the market will react to his, but believe the raise will be mostly symbolic anyway, so any effects should be temporary in nature.
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What’s concerning to me is that everything you need to build infrastructure is cheap… oil, coal, shipping, copper, & steel are all incredibly cheap but nobody’s stepping up to take advantage of it. The world needs someone to take all of these cheap resources and start building things, and the most likely candidate here is India. There are many South American countries that could potentially fill this as well, but I don’t think any of their governments are strong enough to pull it off.
The commodities are cheap in terms of USD but not necessarily if you are buying with Rupees or Reals.
Strange. The preview for your post starts with “of all my positions none makes me sadder than HCLP.” However, when I like on the article itself, that line doesn’t appear anywhere in the body of the post.
I changed my mind
with prices so low , the net revenue to people like the Saudis is much less than if they cut production ten percent and got $70/ bbl or more. I can understand why they might have done this in the first place to (to send a message), but I cannot figure out why any of the national producers want to continue at these levels, when some concerted production cuts would easily yield more net revenue.
Ironically, that was my reasoning for why the Saudi’s shouldn’t have done this in the first place.
Maybe the Saudi’s just aren’t as smart as we thought?
I understand the point about commodities at the big picture level for investors and economies.
Down here at my level, anything well built and well done will require a large quantity of dollars. It will also require people who know what to do, and they are usually expensive.
Less expensive gas is nice, but it doesn’t inspire me to buy other consumer goods with the savings.
So, from my corner things pretty much suck, mainly because of the poor purchasing power of the dollar. Cheap employers and poorly paid workers make terrible things together, and the result is an unpleasant living experience.
Have you seen the crap that passes for work product across the country?
Workers may get 3 percent more to make a product with 25 percent less product for the same dollar cost?
Race to the bottom, my friend.