Friday Oct 3 2014
Word Count 789
Oil Prices Slide Amid Massive Supply
Taken together, oil and stock prices are more likely to fall in tandem than for falling oil prices to stimulate stock prices. That is my minority view for what it is worth. This December will mark the 40th year anniversary of the low in the Dow Industrials at 577. I suggest this might be a good time to be watching stock and oil prices, from the sidelines.
Dennis Elam in One on One, Sept 9, 2014
That prediction has certainly come true a month later, as have all my concerns expressed in this space over the last year. Those specific concerns are that supply will eventually trump demand resulting in lower oil prices. This is part of a larger deflationary trend fueled by cheap money from Central Banks. As in 2007, the result is massive debt and higher asset prices for stocks and real estate, but little for job creation. Some Hedge Funds are now leveraged eight to one in their bets on higher markets.
The illusory light switch of social mood flicked to positive March 9, 2009. A 1932-1937 like stock and real estate rally ensued. But evidence mounts that social mood switches around the world are now turning down. Let’ s connect the news dots of social mood for the real explanation of what is happening.
As the price of oil fell from 1982 into January of 1986, the Saudis were the ‘swing producer of OPEC.’ The Saudis would limit production which kept prices then above $20. By 1986 the Saudis tired of being the balance. World production soared and the price fell to $12. Wednesday this past week Saudi Arabia lowered its official selling price for oil. The message is market share rather than an attempt to shore up price. And so prices plunged to $8.18 Thursday before recovering to $91.40.
And remember, most of the prominent oil producing nations like Nigeria for example, have nothing else to sell, but oil.
And, US refineries are set to undergo seasonal fall maintenance. This means fewer purchases of crude oil. The perfect storm ensues as excess supply is met with lower demand.
The myth that Central Bankers actually control an economy is dying hard as EU President Mario Draghi is learning. Inflation has weakened to a five year low. Translated, there is less and less demand for goods and services amid double-digit unemployment. The ECB is now waiting to see if ‘stimulus will lift the weak economy.’
Mario can check out the Paris Auto Show for an answer. Optimism for a turn in Europe’s log suffering car business that was evident a few months ago is dropping like autumn leaves.
Deflation is on display in both gasoline prices and gasoline components. A spike in supplies has sent US Ethanol prices tumbling to four-year lows. Ethanol futures slid 28% last month as falling domestic demand left US producers with the largest inventories of this year. Note the existence of falling demand in the last two paragraphs.
And just to keep things on edge, the latest cyber attack affected about 76 million of J. P. Morgan Chase’ customers this summer.
Meanwhile positive social mood continues among the promoters of energy conferences. We spotted this promo for the Permian Basin Conference slated for November.
I attended an upbeat presentation on the Eagle Ford Shale by UTSA’s Economic Development Group. It can be viewed on line at http://ccbr.iedtexas.org/.
West Texas' Permian Basin is shattering records and expectations. And all signs point to continued growth. Oil production has surged from a low of 850,000 bpd in 2007 to 1.35 million bpd in 2013. And in May 2014 Permian Basin averaged a record 460 rigs — up 16% from the previous year to a level not seen since at least 1980.
The point here is that one could read the same headlines in this newspaper in 1981. What could go wrong? The answer is that in 1981 we had a record number of rigs running nationally. And that number kept expanding as the price fell. Are we now witnessing a repeat of that same scenario? Indeed we have a 34-year anniversary of record rig count. This is cause for concern, rather than celebration.
September and October are living up to their reputation for exciting, downbeat months in the markets. And to be fair as I write Friday, stocks are rebounding. Volatility is back. But the deflationary forces we have written about for the last year are here in earnest. It would be best to temper enthusiasm for production with a cautionary eye on prices.
Dennis Elam PhD CPA teaches at Texas A & M University San Antonio and blogs on markets at http://www.themarketperspective.com
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