Around this time last year, crude oil looked like it was bottoming out after a long, nasty spill from $104 to $44. The commodity subsequently rallied to around $60, pushing many energy stocks higher in the process.
Market Roundup
But now the bottom is dropping out from under oil again. Crude tanked to as low as $37.50, undercutting the August panic lows and putting it back at levels we haven’t seen since the depths of the Great Recession.
That, in turn, is pulling the rug out from under energy shares, not to mention putting even more pressure on the junk bond market.
The SPDR Barclays High Yield Bond ETF (JNK) just undercut its October lows, leaving it at the lowest level in four years. Shares of one of the most widely held energy sector yield plays, Kinder Morgan Inc. (KMI), also fell again, off 2.6%. It has lost around $9 in the past couple of weeks, putting it down more than 60% year-to-date.
What happened? A Wall Street Journal headline today makes it clear: “As Oil Keeps Falling, Nobody is Blinking.”
|
|
Oil prices have tanked from over $100 a barrel to below $40 today. |
The story chronicles how U.S. production is barely falling, despite the plunge in prices. It cites a handful of reasons: Wells originally planned and drilled years ago when prices were much higher are coming online. Hedges have helped postpone the financial day of reckoning for troubled independent producers. And the need to generate even a reduced level of cash flow is keeping more taps open than you would expect.
Then there’s the landmark OPEC decision from the end of last week. The cartel didn’t just refuse to cut its official 30 million barrel-per-day production target. It actually said it would continue to informally produce 1.5 million more barrels per day than that.
The meeting confirmed that Saudi Arabia is still not blinking with its strategy. The plan? Overproduce in order to drive U.S. shale producers into bankruptcy, and keep the world hooked on Middle Eastern oil.
“Saudi Arabia is still not blinking with its strategy to overproduce to drive U.S. shale producers into bankruptcy.” |
So how low can oil go? Well, now that we’re taking out the August panic low, the next logical technical level to watch is $33. That’s where oil bottomed out during the 2008-09 Great Recession.
It’s not like oil is alone, either. Virtually every major commodity is under pressure. That includes iron ore, which just dropped below $40 per metric ton for the first time since 2009.
Bottom line: Oil should remain firmly on your radar screen as an investor. If crude drops sharply toward its Great Recession lows, that’s going to put even more pressure on the broader junk bond and equity markets. It also tells me the global economy could be in more trouble than is generally appreciated.
So what do you think about oil’s latest swoon? Can anything arrest the slide? How important is it for the broader bond and stock markets? Are you bottom fishing here, or staying away? Hit up the comment section below and share your thoughts.
|
I hope you enjoyed your weekend, and I appreciate your taking the time to comment on some of the major market issues out there.
Reader R.J. weighed in on the outlook for Federal Reserve monetary policy, saying: “If the Fed actually has the guts to raise rates, this would be historic, but not for the reason you think. It would be historic because this would be the first time ever the Fed was ahead of a rate cycle.
“They’ve always been too late to raise rates, then overdo it. Remember, Janet Yellen says their targets have not been reached, and now the farce of the low participation rate due to aging population has been debunked. Also since Bernanke, the Fed has been overly political. So I don’t think they will raise rates.”
Reader Ron added: “I have been puzzled by Yellen and Draghi. I couldn’t remember where I had seen this game before when voila! They are found on street corners in every city playing three-card monty and taking the suckers’ money.
“Now, giving them some credit, they don’t hit and run like the street corner hustlers. But they stick around and manipulate things so it appears everyone is a winner. I have been withdrawing from the market for the past three months and will be 50% before the end of the year. Winter is coming.”
On the other hand, Reader Etoleary was more optimistic about the outlook for markets, saying: “I think you put too much emphasis on oil prices and the causes of credit deterioration. There are plenty of independent indicators that suggest other factors are at work and more potent than $40 oil. The big picture doesn’t support the pessimism that’s so widespread.”
Reader Tom picked up on the same message, saying: “While you’ve been urging people to hoard cash, the market sprung back in spectacular fashion.
“My advice is still the same: Go long the stock market, despite the naysayers. Invest in high quality stocks (especially during the dips) and don’t freak out over every bump. You’ll be rewarded in the long run. Cash? That’s for wimps.”
Thanks for sharing. Even when I don’t agree with the comments posted online, I like to read them so I can get the other side of the story. If you haven’t shared yours yet, take a few moments to do so here at the Money and Markets website.
|
President Obama took to the airwaves for a primetime address yesterday, attempting to ease concerns about terrorism. He also vowed to step up the fight against ISIS, screen travelers more aggressively, and push for stricter gun controls.
Shares of fast casual restaurant chain Chipotle (CMG) plunged after it warned that the recent E. coli outbreak was hammering sales and profit. The company expects to earn just $2.45 to $2.85 on a per-share basis in the final three months of 2015, compared with $3.84 a year earlier. The Centers for Disease Control and Prevention has identified 52 E. coli infections in nine states that may be linked to Chipotle food.
Government opposition scuttled the sale of General Electric’s (GE) appliance division to Electrolux (ELUXY) of Sweden. The $3.3 billion acquisition would’ve given the second-largest global maker of home appliances too much market power in the view of the Department of Justice. Shares of Electrolux dropped more than 10% in their home market on the news.
The Wall Street Journal reported today on the trend I’ve been telling you about for months — namely, that the junk bond market is sending out warning signs about stocks and the economy. High-yield bonds have lost about 2% on the year, even including the higher interest payments they offer. That puts them on track for the first annual losses since the credit crisis.
Any thoughts on the failed appliance merger and its impact on GE shares? What about President Obama’s latest primetime address? And do you find it significant that the Journal is now highlighting the woes in the junk bond market? Tell me about it below.
Until next time,
Mike Larson
P.S. Are you pondering what you should be doing now to preserve your wealth in a world gone mad?
A new report by Weiss Research Senior Analyst LARRY EDELSON has the answers you’re looking for.
Click this link to read your free copy now.
{ 59 comments }
The Fed guaranteed loans for a bunch of bankers who were going broke. Why can’t they do the same for the three dozen or so American oil drillers who have already filed for bankruptcy because of Saudi actions? Isn’t that a kind of economic war against this country? Isn’t oil supply a matter of national defense, if the Middle East oil becomes unobtainable due to all the goings on over there? But, of course, the drillers are not bankers, and not important to the administration or the Fed.
Hi,Chuck : I am with you …if the fed’s had any guts they would support and help the oil company’s’ who really need it to go back to drilling a much oil as can be harvested out of the North American fields and put those 0PEC guys under so much pressure they would have no-where else to go but cut their production ….if the US Government believes one rotten word of these guy’s in OPEC …flood them with our own oil ….get together with Canada , Mexico and South America …and give it to those guy’s right now….I wonder what they would do if we stop buying their oil and become self sufficient as many insider in the oil patch believe we are able to do !!!!!!! or we all tank up for a week and leave our cars at home ….we stop buying gas for a couple of weeks and see where they end up !! Is it not about time that we stop dancing to their oil tune and childish threats ???
Aloha, Same old smell at the pump. no wonder Freddy wants to call OPEC’s bluff. And look how many voters (50%+) just won’t show-up at polls. Perhaps, the retirees will invest a little in dividend paying oil. hal
Impose a tariff on crude to the real fair cost of our current energy supply: $70/barrel. Now is the time for maximum effectiveness. Tariff collected should be put to building infrastructure on oil&gas and our highways&bridges. We should not lull the US Economy into these low gasoline and natural gas prices because when it goes up the impact will be catastrophic.
Hi Fred,
Why not get the Tax Revenue from Growth instead of from Raising taxes?
(That is how Capitalism actually works.) Look what happens when Taxes are raised and Jobs are not created… through real growth.
http://www.businessinsider.com/photos-of-deserted-sears-stores-2015-12?ref=yfp
Will these NEW Taxes be removed when the Oil price goes back up?
The Next New Tax on travel will happen when Cars are Online and your movements
will be tracked and a bill sent to you each month for your miles driven.. (Just think of the business opportunities in finding ways to disconnect the Tracking systems.)
Will it be a roadside sensor that looks for your WiFi signal and takes a picture
of your plate when it does not find a signal? (Used Wireless routers will be a demand
Item to create a false signal.)
How else would a married man conceal his travels to visit his girlfriend if he was tracked with a Toll Bill showing where he was and for how long? (Big Brother)
Take advantage of Lower Gas Prices to stop the wasteful production of Ethanol
that rusts your engine, lowers your Fuel Octane, and reduces Mileage..(and causes Co2 pollution to manufacture it.). It also has to be phased out in the Winter because
it will freeze in your fuel lines.
I wonder why we are not hearing about the hundreds of Oil tankers anchored out of sight…. waiting for Oil Prices to rise again before they sell their cargo?
Why not? Is it because they are finished selling at the higher prices and are now waiting to refill for the Next Cycle.
I bet they are secretly busy filling their holds with New Oil, (Just ask George Soros if he is Shorting oil or buying Oil Futures )
Nervous Investors are afraid to hold oil over a holiday because they can loose their shirts in a blink of an eye.
Wanna bet that the prices will be up again next Summer…. just so the Conservatives can be blamed (in time for the October Surprise.)
We should not fear the elusive Climate Change… It is the Economic Change that
will be the real divider between the Haves and the Have-Nots.
The Rich are still buying Ocean Front Property… Are they Stupid? What about the Ocean Level rise ?
Have a great Christmas
there’ll likely be a consolidation in oil next year with only a handful of large companies remaining. the weak will be gobbled up by the strong. this is the way these cycles go. it’s all meant to happen.
I have been in the oil business for forty years and have never seen anything quite like the current situation. The race to oversupply is unprecedented. The OPEC meeting was something of a surprise to me. Many of the members have to be feeling major pain but that nothing was done or even said to stem the bleeding indicates to me this could go on a lot longer than many people think. We hit $10 in the late nineties and I’m not sure that is out of the question now. Oil has been under $30 for most of my career and I have made a decent living. We have been oversupplied since 2011 and the price held around $100, leading most of us to believe this was the new normal and we made plans accordingly. The price is certainly problematical but the real danger is the high debt levels most of us incurred. Hindsight is great stuff. The US oil industry will adjust and survive as it always has. Nobody is better than us at this game. Jim
the iea charts show the supply & demand curve coming in balance during the second quarter of next year. a wild guess on my part is oil will begin to stabilize after that, but inventories are high and obviously will keep prices in check for sometime.
Aloha, 9,9,9 no,no,no but we may get some $2.50 regular gas, he’a. However, Muffi’s $8.8 Bil elevated clickety clack should break the back of retirees with the 500% increase in property taxes over 9 years. I’m just going to the beach. hal
I have been following the oil, gold trend for the last 30 years.The current situation is the creation by lodging world wide global wars. Whether it is in the oil rich Middle East or South America or EU or Asia, you will find a war syndrome everywhere. That caused the current deflation, which the economists or finance ministers found out of solution. Bring those responsible for current situation to find a solution. Otherwise we may see the oil price dropped at $9 pb soon . Causing another world wide great recession inevitable.
The big story in energy is not shale.
It’s Europe.
The scheme of compulsory cuts in carbon emissions now in force in the Eurozone, mandate a switch-over from carbon-rich coal and oil, to carbon-lean natural gas from Russia.
Oil prices are falling, but Europe cannot take advantage of the low prices, by using more oil.
End result: China is growing. India is growing. The US is growing. All 3 resisted the push for carbon restrictions.
Japan pioneered the carbon emission controls with the Kyoto Protocol. Japan’s economy continues to lose money.
Europe enthusiastically supported Kyoto and is also losing money.
Where is Keystone pipeline now that we really need it? Where is the enabling legislation allowing us to export petroleum /natural gas to Europe? Tangled up in politics working to our detriment.
Mr. Larson, my question to you is everyone is advising to buy Gold and Silver. Okay I went out and purchased some Gold and Silver coins. I’m planning on holding them for the long term. Let’s say Gold goes to $5,000 and Silver goes to $500.00 an ounce then what do I do cash it in? If that scenario happens and the dollar has been devalued by Inflation or deflation what have I accomplished?
GOLD IS UNPREDICTABLE IN THE SHORT TERM
Don’t count your chickens before they are hatched. Gold has a wide range of possible intermediate valuations, ranging from $700.00/ounce at the very low end up to about $1500.00/ounce ( according to economist Martin Armstrong). It could vary anywhere in between these numbers in the next two years. So, go slow and easy and gradually add some coin for long term storage. Do NOT attempt to time what is known to be a volatile and manipulated market. Gold coins dealerships are completely unregulated. So, buyer beware, as well.
You would have many more dollars from selling your gold than if you stayed in cash and then had those dollars purchasing power decimated. Basically you maintained your purchasing power.
We may have more room for oil to drop, but today I invested another 20% of my total portfolio into the OIL ETF…$6.78/share. Long OIL.
you seem very knowledgeable, by when do you think oil will drop to about low 30’s ? do you think it might drop that low by the beginning of the year?
Let oil fall to $25, That will help Joe Sixpack who makes $40K per year. The Koch brothers and Rex Tillerson don’t need help from anyone. Neither does low energy prices hurt those who still own energy stocks. Nature has them locked in their own low IQs.
I learned in the Army that for every soldier there were about six civilians supporting each one of us. So taking that into consideration, think about this. There will be probably 300,000 jobs lost in the US energy companies, whether E&P or Transportation, or Refineries. Now factor in the six multiple and you have upwards of over 2,000,000 Americans potentially out of work or reduced quality jobs. Is that good for the economy?
Since the Oil Embargo of 1973 there has been a deafening chorus saying that America must become energy independent. With the benefit of higher prices and improved technology the US Oil &Gas industry made a spectacular effort to do just that and was well on the way to achieving it. Now that our enemies have succeeded in bringing the entire process to a screeching halt everyone cheers. Whose side are you on? Are you really naive enough to think returning the power to OPEC is going to benefit the
American consumer in the long run? No way! Jim
Start figuring out how to deal with deflation folks. It probably won’t last long, and will be followed by a serious spike in inflation caused by a talentless fed, and greedy bankers. Hold on, the ride is gonna get rough.
I don’t use MIddle East oil for transportation and neither should you. Buy a flex fuel car and use E85. No oil in my tank! Most of you are too old to fight in the Army now. So, fight with your wallet instead! Are you patriotic enough?
Get a Chevy Volt. They are even better. Fantastic machine.
I find it somewhat ironic that far and away the biggest source of carbon emissions is the generation of electricity. Jim
you’re thinking of the days of coal generation when we were young. coal is passe and oil is expensive. natgas has half the carbon oxides of oil. add some solar and wind to that and you can see how emissions are better controlled at a central power plant.
It’s still the number one source. Half the electricity generated is lost in the transmission. Our current electricity grid is an aging, obsolete, inefficient industry left over from the last century. Jim.
more and more homes are being built off the grid. my next home will have no utilities run to the house, and just the money i save in connection fees will cover a good portion of the cost of my alternative sources. i’ll be able to charge up the battery in my car with the power of the sun. the heyday of the utilities may soon be over.
Now you’re talking! Jim
No GM, they took the bail out. Buy Ford !
Trouble is we can’t expand CNG fueling stations (or any other type of alternate fuel) when CNG price is now the same or higher than gasoline. And natural gas royalty payments to landowners and investors are nearly zero now because the cost to tend existing wells is same as gross revenue.
Watch out: Oil and Gas Well Joint Ventures are beginning to ask investors to pay for shortfalls for operating wells where revenue is less than cost and to cover costs to plug wells. Abnormally low crude burns every taxpayer in ways we never expected.
i’ve been saying for a long time. dirt cheap oil and rock bottom rates are here to stay. cheap oil begets expensive oil, just like expensive oil begets cheap oil. in time, cheap oil will wake up sleepy economies around the world and increased demand will restart a new commodities bull. supply will likely remain full tilt as increased demand appears to be the only solution to the problem, which means real financial trouble for some oil countries. can you see the future of miners? or p&e?
the good news is the ecb just took some pressure of the dollar giving yellen the green light to raise rates. the world needs to exit deflation mode asap.
Oil price is very low to $40 ,but our Canadian gas stations price is $1.23/L. Does it make any difference at all for ordinary people?
Where in Canada? We’re at 98.5cents. We are still screwed by the Feds at that price.
Keep an eye on the gold/oil ratio. With oil falling and gold stabilizing, the ratio of gold to oil is soaring. Don’t be shocked early next year if Russia and Saudi Arabia tell Europe they have to pay for their oil & gas in gold. This will stabilize the oil price but send the gold price skyrocketing.
I want it to go the price it was in 1948 0.29 Reg 0.31 ethel
Considering the devaluation of the buck, gas is actually cheaper than that now. So you actually want it to go up.
Bottom fishing. [I hope]
We are on the verge of another recession. Europe, Japan, Canada, and Russia are already there.
The Saudi’s can profit at $20 a barrel, not to mention $30 or $40. While that hurts US producers they can’t just shut off their cash flow and wait until prices recover.
We are in a war. While there are many elements unique and unconventional (e.g. social media and encrypted internet communications) ISIS has also taken territory and declared a new caliphate. Instead of a declaration of war our naive and feckless President is focused on global warming (actually a good thing), meaningless gun controls, and the insignificant hate crimes against Muslims (there are 4 times as many incidents against Jews than Muslims. How many attack must we suffer before we wake up?
WE are awake, silly. the dumb ssa in the white house is a liberal idiot Muslim enemy.
When I was 12 yrs old riding in the back seat with my ma driving our ’31 model A we got reg. for 19.9 a gallon — I bet there was 2.5-3.3 cents a gallon road tax too . ALSO we got double scoop cones for 5 cents too- that was at most twice a month on a FRI nite .!ALSO AT that time there weren’t NO FREE lunches — we at times got up to 5 apples for lunch . SURE WEREN’T SO DAM MANY OBESE PEOPLE WADDLING AROUND EITHER !! Bernie sr.
What happened to plain sensible economics? It seems to me that the major economic driver is mostly Geo-politics, not fundamental sound market supply and demand. We are at the mercy of politicians with all their whims resulting in real bad insight and poor assessments on a global scale. Central banks have become the first line of defense instead of being the last resort for lending. The world is drowned in debt. It is time for a new beginning! The price of progress is the pain in change!!
is all about to destroy Russia the only country that is NOT giving up to the Luciferian Greedy Evil Crooks Saudi and ten more countries are destroying YEMEN ???? Iraq, Libya, and now they want to destroy Syria .. And IRAN is a BIG fish to fry .. While also destroying USA and stealing our money and dumping their bad DEBTs to us tax payers .. While this Evil Greedy Crook ones walk away with TRILLIONS … America needs to Wake up and Stop them
Merry Christmas to you all and Pray for America to Return to GOD !
i never to put the enemy in washington DC.
I’m expecting one more push up in most US Stock Markets probably into February – perfect for a Santa Claus rally?
On Oil. Saudi seems hell bent on going down with the Oil Drillers in the USA? Actually something no one is talking about? Maybe Saudi’s have besides a dual purpose of driving out the US drilling competition and punishing Putin for his incursion into Syria -maybe, just maybe they want to take the US Stock Markets for a Crash, to pay back Obama for all the stabs in the back, reniging on our long standing policy with them for Security for releasing oil supply when requested by past US Presidents to help our when recessions occured in the USA.
And, now with the USD surging they can greater afford to do this. The higher USD is giving them more goods/ services internal to their economy than when the USD was a lot lower?
Martin,
Thank you for writing one of the more articulate, detailed and accurate articles on Money and Markets today. I wanted to say this on your article, however this system didn’t allow anyone to comment after the first 15 comments early this morning.
Bill
CEO, ChristiaNet, Inc.
Mike, Re: a bottom for oil?
Just looking at the charts……oil should be approaching a temporary bottom.
But we could be nearing a point of great market instability when anything goes. As someone mentioned above, $10/bbl oil or even lower is not out of the question. And the Middle Eastern countries will be hurt much worse than us if this happens.
The real loser here is The Russian Bear. Their economy is being devastated. Jim
A crazy market, I don’t have a clue. It’ll be what it will be then we’ll see?
mule
Over production by leading world oil producers. It is what it is.
Kinder Morgan: The price action has been horrible. Several large institutional investors have been shorting the stock and buying the bonds. Arbitrage! The result is a very large short interest. Any change in sentiment could lead to a very rapid snap back. Jim
All OPEC can do is get the Saudis to increase production? Not much of an organization. My opinion Brent hits $25 Putin goes ballistic. My opinion tap some reserves and let Saudi stockpile. The U.S.A. doesnt need the bullcrap.
Dollar cost average gas stocks.
Suggest NTI and CQP
great timely article…i am 81 years ” young “, born in a west Texas dust storm in 1934…worked in the ” oil patch “… roughneck and pipeliner while attending Texas a @ m… sales engineer for many years calling on the oil and gas industry in Texas, Louisiana and Oklahoma… those folks were the salt of the earth…have seen many ups and downs…family and friends stacked rigs and declared bankruptcy…i remember, during world war 2, when these wildcatters answered our nations call…and our illustrious govt. threw them a bon with a twenty two and a half percent depletion allowance…
bottom line…we need to be energy independent…no imports from across the pond, period…where is our government now ???
vote them the hell out…let them freeze to death in the night !!!
Michael, Deflation, a Keynesian Central Bankers worst nightmare is roaring around the world…Who created the Deflation??? Yes, the Keynesian Central Bankers with all their money printing has in a paradoxical way lead to the mis-allocation and distortions of capital that caused a boom of growth and associated Debt that is unsustainable!
Mike: I think oil will hit its bottom of 33.00 per barrell\. Saudi Arabia will not cut production, either will the rest of Opec. Saudi’s feel betrayed at our cozing up to Iran. We should export as much oil as possible to Japan. Japan has no natural resources of its own. We should also market Europe and give Putin some competition. The world’s economy is going through the beginning of a deflationary stage due to excessive debt caused by too much speculation during the boom period. The Fed is going to raise interest rates. However, Mrs Yellon is raising rates into weakness and not strengh. Regards, Robert Calabro.
Oil prices-seems to me oil approached $10 a bbl in 1998 due to severe over pumping by our mid-eastern friends and that was before China came on big time. US oil needs to sit on their hands and stop pumping- permian basin wells have done this for years. Oil always comes back-cars, planes and trains keep right on running and the Chinese are now middle class consumers. Overextended Baaken drillers-sorry about that and stick your fracking oil where the sun don’t shine.
If OPEC’S goal is to put America’s oil industry out of business it will not work. Regardless who goes out of business, the oil that is in the ground will still be there. Next guy up will get it out of the ground when prices go back up.
What our Federal Government needs to do is stop imports of oil from middle eastern countries. Oil companies are laying off people by the thousands. The question is, is it more important to keep middle eastern people working or is it more important to keep Americans working?