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The Oil Price Decline - In Pictures
Submitted by Lance Roberts of STA Wealth Management,
In early August, I issued the following warning about oil and energy related stocks in the weekly newsletter (subscribe for free weekly e-delivery):
"While oil prices have surged this year on the back of geopolitical concerns, the performance of energy stocks has far outpaced the underlying commodity.
The deviation between energy and the price of oil is at very dangerous levels. Valuations in this sector are also grossly extended from long term norms.
If oil prices break below the consolidation channel OR a more severe correction in the markets occurs, the overweighting of energy in portfolios could lead to excessive capital destruction.
While the argument has been primarily focused on the 'yield chase,' the 'price destruction' will far outweigh the desire for income. It is a good time to take profits in the sector and reweight portfolios back to target goals."
As oil prices took out the long term trend line, the expected reversion in equity prices also began.
There is no doubt that the current selloff in oil prices has gotten extreme. However, what is interesting is that such price declines in oil prices have often been associated with rather sharp economic slowdowns or recessions. Currently, economists are expecting robust economic growth going into 2015 and suggesting that falling oil prices will boost consumption. However, as I discussed recently, there is very little evidence to support that claim.
"Personal Consumption Expenditure (PCE) number that comprises roughly 2/3rds of the economic GDP calculation. Therefore, we can also analyze falling gasoline prices as it relates to total PCE. Again, falling gas prices should lead to increases in PCE."
"While the argument that declines in energy and gasoline prices should lead to stronger consumption sounds logical, the data suggests that this is not actually the case. With consumers heavily leveraged already, any increases in disposable incomes from lower gasoline prices are likely negligible in terms of their monthly spending."
The purpose of today's post is to give you a series of charts to analyze the current decline in oil prices and provide some clarity on the expected impact to both the energy sector and the economy as a whole.
Historically, when the 24-month rate of change in oil prices has exceeded 100%, it has been a precursor to economic weakness.
Of course, the economics of oil are driven by supply and demand.
"The drop in demand is being driven, no pun intended, by a change in demographics, a rise in telecommuting, a structural shift in unemployment (large pool of working age individuals outside of the labor force) and increases fuel efficiency. These dynamics are likely not to change in the foreseeable future as economic growth rates globally continue to 'muddle along.'"
Technically Speaking
As discussed above, the price of oil has now broken below very important long-term trend lines.
Oil is now on an important "SELL" signal which suggests that prices still have more downside risk at the moment.
Since it is primarily the speculation in the options pits that move the price of oil in the short term, it is not surprising to see a collapse in both the net reportable contracts outstanding and oil prices.
However, it is worth noting that the current price divergence between the S&P 500 index and oil prices has historically not been sustainable.
The Economics Of It
As with all things, eventually the price of oil is a supply/demand issue. As shown above, the sharp increase in production brought on by "fracking" has certainly been quite remarkable. However, this remarkable resurgence in oil production currently faces two extremely strong headwinds. The total amount of available refining capacity and the level of end demand are both declining.
While the "fracking miracle" has boosted the production of raw crude in recent years, such production is only useful if you can convert the base commodity into a useful byproduct. The problem, as shown in the two charts below, is that the the number of operating refineries has continued to fall, as the regulatory environment has stifled the ability to build new plants, and operating plants are already running near full capacity.
With very little spare capacity available domestically, the "hope" is that the U.S. can start exporting the excess to foreign countries. However, as discussed in the first chart above, global demand for oil is dropping as the Eurozone and Japan struggle with extremely weak economic growth.
Finally, since oil is priced in U.S. dollars, the surging U.S. dollar as of late only makes oil more expensive to foreign customers which will crimp demand further. The chart below shows the long history of the inverse correlation between the US Dollar and Oil Prices.
For investors long "energy" at the current time, oil prices are indeed extremely oversold and are due for a bounce. That "bounce" should likely be used to substantially reduce energy positions in the short term as an increasing amount of data suggests oil prices could go lower.
For longer term investors, the decline in energy prices also suggests a much weaker domestic economy. As I have discussed for a while now, the deflationary pressures from abroad will impact the U.S. more substantially than most economists predict currently. That risk to economic strength, and ultimately corporate profits, puts extremely elevated stock prices at risk.
In either case, the decline in oil prices is a clear message that "something is awry" globally and investors should take heed that risks of a market decline have risen markedly. While I am not saying that the economy is about to slide off into a recession, previous declines in oil prices of the current magnitude have been associated with poor outcomes for investors. Caution is advised.
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Just heard Putin dropped the Southstream pipe.
If I lived in Southeastern Europe, I would be angry at him about that. :-)
Yeah, but that's only half of the news... See link below. Huge news.
Screw Brussels.
rt reporting a deal between RU and TR for gas, RU stepping away from southstream, and new pipeline to be built by RU across black sea to supply TR.
edit to add: this has been on RT for a bit now following the live presser with Putin and Erdogan, yet nothing in US MSM (wsj, cnbc)
When are you going to post the biggest geopolitical news of the day?
http://rt.com/news/210511-russia-turkey-gas-pipeline/
The BRIICTS are born.
"The BRITICS are coming, the BRITICS are coming!" -noben
One if by land...
Indeed; this have me scratching my head
Turkey is backing ISIS, ISIS is Targeting the Assad regime with the help of USA
Russia is backing Assad against Isis/Nato
Why? It doesn't make any sense?
Senduko: Indeed; this have me scratching my head Turkey is backing ISIS, ISIS is Targeting the Assad regime with the help of USA Russia is backing Assad against Isis/Nato Why? It doesn't make any sense?
You forgot the 5 ISIS training camps in Jordan. US tax dollars at work.
Then King Abdullah walks on in and buys up all the Shale oil plays for pennies on the dollar to replace his declining Ghawar field..Takeover now complete...Kneel before your new King!
Trust me, the Central Bankers and Fed will rearrange all of your Black and Red Squiggly lines and you'll finally see that everything is just as it should be. Move along..Nothing to see here. My fucking head is aching from looking at those charts.
Why do all of these "wealth managers" use stockcharts.com?
because stockcharts.com is "simply the Web's best stockcharts!"
US/EU ...or
Saudi, Iran, Venezuela, Russia, Nigeria, UAE, Iraq.....
PLEASE VOTE: Where will oil price decline related bankruptcies be?
All of the Above.
Awry-ty then. Now what?
I have read some analysis today calling for possible $40 oil coming. This level would shake the foundations of the oil states, and remember, after all the hype, the USA now claims status as One Of These Major Oil Producing States. So, some serious market beatings will be taken here. I see Frackers Stocks are being beaten black and blue. My major belief is that without high oil revenues, US Frackers can't service all their debt loads and all those junk bonds being held from Frackers are going to be toilet paper is $40 a barrel is hit.
Energy HY paper has been beaten already and the beatings will continue until moral improves.
Jack....this little slide will be short lived. Might make a few sheeple blow a few extra bucks on Christmas Shopping......and then it will be back to business as usual. All of this is planned and orchestrated....the only ones who think otherwise are....well.....delusional at best.
According to citi, the break even point for the saudis is $98. Most oil nations need $100+ oil to cover all costs. The question is who is going to get squeezed out of profits. We know the answer on that one. Yet, what is most concerning is the facade of the oil game. The numbers are relative to the dollar. This is clearly a move away from the petro dollar.
Yikes
The break even point for this lie is $1.25.
Liars corroborating the lies of other liars.
Please, sir. Can I have some moar?
It's weird that while energy products such as coal, oil and natural gas rates have dramatically declined, here in Massachusetts my residential electricity renewal rate was increased by 35% and when I shopped around, I found several other 'competitive' suppliers were increasing by 50%! Some bullshit about tight natural gas pipelines (although I am told that natural gas to home is also declining!). It appears to me like Massachusetts is being 'Enroned' by the electricity suppliers enabled by 'deregulation'.
Electricity in the US is a state sanctioned monopoly. They request rate increases every 1-3 years (depending on the state). They never request a decrease. The energy supply is just 1 component of overall electricity rates.
If you want your rates to go down then put solar on your house. You will also get some great tax credits.
Apparently rates are no longer regulated in this 'deregulated' market. The players have created a facade of competitive market by employing a bunch of middlemen (marketers who have to face the flak regarding the price increase which are really perpetrated by just 5 electricity generators) but it is really a monopolistic marketplace that really requires regulation. It is no wonder I read an article that said that the CEOs (of major electricity suppliers in Mass) annual compensation has almost doubled to something like $8million!
Yet another disaster similar to removal of Glass Stegall regulation.
That is the monopolisitc game magic man. No magic or fantasy in monopolisitc industries. They raise costs, sanctioned by government and thier inefficiencies are your loss. Now, go and buy some iPads to make up for the loss of GDP in shale.
The Algonquin pipeline in new england has some delivery issues but the local NIMBY's won't let them lay new pipe to correct the problem. Meantime the NEPOOL iso is shoving high priced renewables down your throat. It costs twice as much to make electricity out of wind or solar as it does natural gas or coal. The renewable mandates are casue ing high prices in new england and california. I live in Texas and our electricity rates are about half the price of Calif or New England
Well, I guess I'm confused (suprize! Am I alone?)
High energy costs = bad for economy
Low energy costs = bad for economy
WTF? Wouldn't it just make sense to burn up all the Saudi oil while it's dirt cheap and sit on the shale as a strategic reserve? By the by, whatever happened to that Strategic Reserve the US put aside for rainy days. Was that all BS too? Sure looks like it in todays enviroment.
With all the lies and misinformation and under the table geo political wheeling and dealing who the hell knows what's happening? As in REALLY happening.
How the hell can you invest in a rigged game like this.
Might as well consult the magic 8 ball as anything else.
Low energy costs are not bad for the economy they are an indication of direction in which the economy is already headed (lower demand = lower economic activity)...
This has nothing to do with anything except the west trying to hurt Russia...Anyone that thinks fundamentals have anything to do with market prices is living in a fantasy world...As soon as they are done playing their game with Russia, oil prices will go thru the roof....Mark my words. They are selling the shale industry out to the woodshed, just to bankrupt Russia...BUt when the oil pries go back up, the shale industry will revive...I wish I had money because I would most certainly invest in my analogy
Saudi's want the shale play out just as much if not more than mother Russia...
I disagree, although that is certainly part of it.
No, I believe TPTB saw RECESSION COMING, and therefore engineered a small "tax cut" to give the proles a tad more discretionary spending power.
Please recall The Rockefeller Fund sold all of their OIL STOCKS about 9 months ago.
It pays to be the King.
Altho TPTB are causing the recession which is already here, you may have a point. Maybe they are trying to slow it down a bit because it was going to fast for them and their police state is not going so well as they planned..I still say the main reason is Russia tho because of the timing. Good point tho.
Bullshit.
It was on this site over a year ago where ZH pointed out from data released by the EIA (Energy Information Agency): Oil consumption at levels not seen since the 1970's. that should have been all ANYBODY needed to see to get the fuck out of the oil and gas complex. And energy stocks have done nothing since then! This is totally a demand problem!! Solvency depends on receipts and receipts depend on volume - end of story. And just like in the 1980's (for those who continue to beleive that somehow the government or somebody is going to save them from $80 break-even oil with price supports.......or something) here is what will happen - The levered up shale guys will default and shale assets will trade 10 cents on the dollar (because - thats what happens when you fuck up on forecasting price in the context of central bank propping up markets), new shale operators will enjoy reduced labor costs, lease costs, and their cost of capital at or near zero - what's not to like!!? They will operate profitably at $60 or $50, or $40 oil or whatever the "new" break-even is.
Its a beautiful thing - this price deflation (not to be confused with monetary deflation). It takes away assets from dumbasses and exchanges them with prudent investors for 10 cents on the dollar - as long as Janet isn't buying up that paper too along with all the shitty MBS's they were buying at $85B/month.
fuck the shale guys and this has NOTHING to do with the west trying to screw the Russians!! fuck sakes - i mean if you need a story - well there you go. Fact is, oil went nowhere during all of the Russian Ukraine fiasco. So lets abandon that thesis for a while, shall we? Its a pegged leg argument at best, and is a distraction from what is really going on - shitty economies EVERYWHERE!!!
The EIA.. Major LOL!!! Is that like the FDA who approves only good food and drugs! Lol..Or maybe the CIA who is only out to protect us? lol...Nope this is all about Russia...Russia will hurt if oil goes below 70..So they are keeping it right between 65-70 to hurt Russia but not hurt their pocket books too much...Still cant decide whether to take the red pill or the blue pill yet? Watch and learn.
Stay long the oil and gas brother and you're going to get your ass handed to you. Just like 2009, just like 2002, just like 1995, 1987, and 1980. Fuck. YOU watch and learn!!
THe United Nations wants very much to have very expensive gas, because of "glogal warming"...they were doing it too, but they had to back off awhile because of the Russia thing....The dates you give are the past, and this is not the past...We are not in Kansas anymore Toto...The u.n. will get what they want.
Read it for yourself: http://completecolorado.com/pagetwo/2014/06/11/martin-files-expose-what-...
Then do some more research on it.
"Its going to be different this time." Its always going to be different, and guess what?.......IT NEVER IS DIFFERENT.......EVER
And my apologies for being sarcastic....We should be here to share info and ideas and not putting others down...My apologies and I will try not to let it happen again.
couldn't agree moar.
and that should have been "Oil demand at levels not... etc..." because real oil consumption was probably even less than that.
Oil poor countries have been filling salt caverns, empty tanks and rented tankers since the first SHTF 6 years ago. And they're all filled up by now. Nothing left to fill.
The only reason you're seeing such high break even numbers is because oil industry accounting runs on LIFO and now they'll have tax losses with which to rob the treasury.
but if Honolulu Blackie's advisors tell him that the fiction will goose his approval rating from the mid 30's to the low 40's, he'll gladly say he planned it.
+1 exactly bid!
Never do things for just one reason. Its foolish to assume this doesn't have "anything to do with Russia".
Indeed, if we are headed towards war, having the shale oil infrastructure in the US is what becomes most important. The price of oil will become, well, priceless in case of war. The havoc among the shale-order producers is acceptable collateral damage if it harms the Russians, assuming production can be restarted.
In a war-time command economy, the Government just takes and manufacturers what it wants, with a promise to pay up after the war (assuming it wins).
Of course, two can play the same game. The difference is that the Russians have no debts and lots of gold, and the long suffering Russian people are still pretty robust, the US sofa pilots and EBT queens not so much.
Unfortunately, the engineered oil price collapse IMHO just tends to confirm that we are well into the end game, as if there weren't enough evidence already. I'll be surprised if we make it far into 2015 before it does...
Anyone know if gasoline keeps in those hard plastic kiddie pools? Maybe a tarp over it, or sumpin?
VERY dangerous. The fumes produced over such a large surface certainly NOT advisable even with a tarp.
5 Gallon Buckets with lids and duck tape are alot safer, besides then you can still smoke in your Garage! I am approching 300 gallons! Don't forget the Gas saver! :^)
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered." Thomas Jefferson.
When financial problems occur in the energy sector it is often accompanied by political instability and sometimes her ugly sister war. As a rule the economy loves stability, bottom-line dropping oil prices means more risk for an already shaky world economy. All this is being complicated by the recently strong dollar. The dollars strength and the rising American stock market could also be taken as a sign of an unstable global economy.
When a strong shift in currencies occurs someone usually gets hurt and this can lead to bankruptcy, default, or contagion. A great deal of the shadow banking world overlaps and falls into the grey world of derivatives. The total derivatives market has grown to a massive size. It includes hundreds of trillions of dollars in over-the-counter non-reported agreements and private contracts and is estimated to be over 20 times larger than the global economy. Everyone paying attention knows that even a slight problem in a market this size could collapse the whole economic system. The article below delves deeper into the problems caused by falling oil prices.
http://brucewilds.blogspot.com/2014/11/dropping-oil-prices-increase-risk-to.html
You can't compare what economies/stock markets have historically done in comparison to oil prices because this economy, due to the massive stimulus of central banks, is different than anyone before it.
As for oil, all that happened is that Libya resumed production, and the market expected the Saudis to cut production to keep prices high, and the Saudis smartly balked. Why? Because they were losing market share already even after Obama gifted the Saudis the Iranian sanctions forcing oil consumers to switch buying from Iran to Saudi Arabia.
If you added in what Libyan and Iranian oil production could be, there was around 5 million barrels per day spare capacity in the world, and the EIA consistenly published a number half that total. With that much spare capacity, there was never any reason for oil to be $100 a barrel much less $110 with the Russian-Ukraine "crisis".