Eq: Energy (22)
Oil took a phenomenal turn lower this week as news came out that half of Saudi Arabia’s oil production had been taken out via drone strikes. Yemeni’s took credit, but many suspect it actually came at the hands of Iran. Oil moved in a big way, up 20% at one point, representing the biggest percentage move in three decades. The drone strike is hugely consequential, as it removed 5% of the world’s daily oil supply. Airlines stocks were hit badly on the news, and Amazon may be the next big victim as higher oil prices mean higher shipping costs.
FINSUM: This big change is going to filter through markets in different ways, but the threat to Amazon seems real and very meaningful.
All the signs seem to point to commodity prices headed lower. Why you may ask? Pretty simple—the economy looks to be weakening, so demand will be lower at a time when supply will stay high. But no so fast, says Evercore, who argues that oil prices may be in for a counterintuitive rise of at least 19% by the end of the year. Evercore contends that production will be flat this year, as OPEC is curtailing output. At the same time, global monetary policy easing is likely to sustain demand, meaning the basic picture for oil may be more bullish.
FINSUM: We think this is an optimistic view that does not take full account of the worsening economic outlook.
The Chinese Yuan reached a landmark and worrying level today. It fell to below 7 versus the Dollar, marking its weakest point in 11 years. The weakening currency could help Beijing offset economic weakness from tariffs. “We will see a new wave of depreciation among Asian currencies in the foreseeable future, and there could be further risk-off movements in the global markets. It looks like a tsunami is coming”, said an economist at Commerzbank. This will have major implications for commodities as China is the world’s biggest consumer, and now that the currency is weaker, it will be harder to buy, meaning prices must come down.
FINSUM: Dollar prices for commodities (almost all are priced in Dollars) will need to come down commensurately with the Yuan in order for the Chinese to maintain their purchasing power.
We know, we know, you don’t want to hear about oil. No one seems interested in the all-important commodity at the moment, but that is exactly why you might want to pay attention. Oil stocks have had a terrible decade—down 10% while the S&P 500 rose almost 300%, hence the derision they face from investors. Prices are so low that oil now composes just 4.5% of the S&P 500, very near to the lowest ever (in 1999). The big question investors need to be asking themselves is “is this peak pessimism”?
FINSUM: We think oil stocks offer some value right now, but what will be the catalyst to make them rise? A big economic boom seems unlikely at present. Oil missed this cycle and it is still oversupplied. We would stay away.
Oil prices are going to get some support as OPEC is planning to cut its output. That won’t be welcome news to those at the pump this summer, but it is good for the oil industry. Within the cuts, there will be winners and losers. One big worry is that the cuts won’t even work because there is still too much production from the US and because the primary fears are on the demand side, not the production side. The key is to buy oil stocks that can thrive in a low price environment and deliver improving returns to investors. These include EOG Resources, Suncor, Pioneer Natural Resources, NRG Energy, and Delek.
FINSUM: Oil stocks are deeply out of favor right now, so this is quite a contrarian call, but given the catalyst of OPEC cut they may be a solid bet.
Something very interesting is happening across commodities markets—they are rallying. The reason this is interesting is it is a broad-based rally, not just in a narrow safe haven like gold. Oil, a major barometer for growth, is also jumping. The reasons why are two-part. Firstly, the US and China seemed to ease trade tensions somewhat this week at the G20; but secondly, OPEC has said it is cutting oil output. Metals, grains, and emerging markets also rallied.
FINSUM: This makes sense because a de-escalation of the trade war would help the global economy. Further, a reduction in tariffs would simply make the flow of commodities and goods smoother once again.
Oil is looking likely to fall sharply, and not just because the world’s economy is looking soft. According to the IEA, oil supply is likely to dwarf demand next year, which will very likely lead to lower prices. Many new projects will come online, boosting oil supply far more than demand, which may only grow slightly, or even shrink if the economy heads downward. This will put more pressure on OPEC.
FINSUM: Nothing is looking bullish about oil other than geopolitical tensions (the effects of which tend to blow over quickly).
With all the volatility in stocks and bonds over the last few months, oil hasn’t gotten much attention. Drivers will have noticed gas is cheap right now, as oil prices have fallen considerably over the last several months. But will it stay that way? Right now the IEA is forecasting solid global demand growth in 2019, which should keep prices strong, but that forecast is vulnerable to some big swings. The IEA warns that since the signals from the global economy are not strong, the forecast could have some considerable downside.
FINSUM: Oil will probably dance to the music of the economy this year. It does not seem to be a significant leading indicator at the moment.
Oil has been whipsawing all over the place lately. For the last several weeks, oil has mostly fallen, with some short term big rallies along the way. One of those was just a couple days ago when Saudi Arabia and Russia announced an agreement to cut output. However, the bottom has fallen out of the commodity as Saudi Arabia’s energy minister announced that he would only favor a small cut. This led to big doubts about whether the efforts will actually lower supply, sending prices spiraling down 5%.
FINSUM: This seems to be a direct consequence of the US’ ability to boost its production to offset any declines by OPEC. Accordingly, Saudi Arabia doesn’t want to lower its revenue by cutting only for the US to take advantage.
If you haven’t been paying attention, something very interesting has been happening in the oil market. That development is that the US has quietly replaced Saudi Arabia as the world’s largest oil producer. That is a major development because the US is outside of OPEC and thus is a major counter-balance (headache) to Saudi Arabia and OPEC’s ability to control oil prices. Each time Riyadh wants to cut output to boost prices, the US can raise its production to offset the cut.
FINSUM: The US is in a strategically superior position for the first time in a very long time. This whole dynamic is symptomatic of the new era of bountiful oil. We ultimately believe that prices will stay well below $100 for several years to come because of how supplied the market is.
Oil has been falling for several weeks, with prices dipping below the $50 mark for US crude. However, over the last couple of days, the price of black gold has surged. Investors may be left wondering what it all means. The answer is that Saudi Arabia and Russia announced their intentions to work together on another output cut, which sent prices surging. On the sidelines of the G-20, the Saudis and Vladimir Putin agreed to extend their output cuts. At the same times, Canada announced a curb on production.
FINSUM: Just as we have been saying, current movements in oil are particular to the sector and not indicative of the wider economy.
The oil market has been in an extremely rough patch over the last several weeks. Just a couple months ago, many were talking about the return of $100 oil. Suddenly, prices are just half that. The question is where is crude headed next. Well, the Saudis seem committed to keeping it weak, as the Kingdom, which leads OPEC, has just announced that it will not cut production. The catch is that it said it will not do so alone, which keeps the door open to another coordinated OPEC-wide cut, such as happened several months ago.
FINSUM: The big difference between a coordinated cut now and the one from a couple years ago is that the world looks much closer to recession a present, which means demand could flatten or fall even if output lowers. That means producers could lose revenue by cutting (instead of the difference being made up by price gains), which makes a big difference.
When oil falls it tends to boost the US economy. For all the growth of our shale industry, the US is still a net importer of oil. When prices fall, Americans tend to spend more on other items that boost the economy, so oil prices sinking is usually good news. However, this time around, the fall will be bad, at least according to the Wall Street Journal. The problem is that the oil industry has grown large enough that capital expenditures in the sector make a major impact on growth. Accordingly, the capex cut that will come from falling prices will be prove a net detriment to GDP figures.
FINSUM: When oil fell in 2014-2016, US economic output also slowed, so this is a very real affect. What is worse is that it will likely show up in 2019, which is already looking to be a much weaker year.
Oil, like many other commodities, is seen as a good leading indicator of the economy. Because it is a strong gauge for total economic demand, it functions are a good bellwether of future growth. However, Barron’s is arguing that, right now, the signal is broken. There are a number of reasons why. The foremost of them are that the recent moves in oil have much more to do with supply growth and geopolitics than they do with economic demand.
FINSUM: Oil is not a good barometer of the economy right now because of its own issues. The oil market has changed dramatically in the last decade because of the huge expansion of oil reserves due to shale. That has led to the whole sector recalibrating itself. As evidence of this argument, take for instance the fact that oil suffered an extreme bear market from 2014-2016, but the global economy kept expanding nicely.