Monday, August 1, 2016

Oil Price: $39.98 going down?

Well while no one was really paying attention to anything oil price have crashed by nearly 20% over the past few weeks.  No so long ago, oil prices were trading around US$50/bbl now they are below (okay a little above right his minute) US$ 40/bbl.  The first impact will be on inflation that was already low, is about to get lower.

The real issue is what does this mean for the world economy:

America is a now a net producer and as such lower oil prices are certain to hit, a huge chuck of the sub-prime credits are in the American oil and gas shale boom (past tense) and these loans that were slowly recovering are getting hit hard again.  

Canada is also a producer and as such lower oil prices will hit the Canadian dollar -- the economy too by the way.  Things are difficult, bit the Federal and Alberta count on oil royalties to meet certain of the costs -- these are now a lot lower.  Alberta is even flirting with income taxes.

Europe which is a net importer of all energy things is breathing in with a sigh of relief; the past 4 months have been difficult -- first Greece (the problem doesn't go away), Brexit, Italian banks and now Turkey's recent coup attempt.  Lower oil prices are the first good news in a long time -- especially after the last few weeks of Trump (Ukraine can go to Russia, Brexit is good and NATO is dead to him).  These have been trying times for Europe, lower energy prices are a nice break from the bad news of late.

China is the world's second largest energy consumer as such lower oil prices are good news.  The same holds for Japan, while Malaysia and Indonesia are suffering.  Australia is in the same position as is Canada -- the two economies are very similar.

So that's my view of the world -- simplified version.  Markets are slightly off today as is the US dollar which is fine, but we are still talking basis points -- these are minuscule movements, despite the market's desire for bold move there is simply no interest in doing anything.  

The shell shock of Trump's statements over the past few days reach a new level of stupid -- at one point you wonder if anything will ever stick -- "Russia has not invaded the Ukraine" is the most brazen comment that Trump made over the weekend -- he also decided that the family of a fallen soldier loss of a son to war was the same as his ability to create jobs... really the man is something else.  Unfortunately, America's far right has become cruel for the sake of kicking a fallen man for the pleasure of it all.  They don't care about any of this stuff, they are mad and they will get even -- whatever that means for them.  

Going forward what does this mean for the market?  If you are a chartist nothing good -- generally the correlation between the S&P500 and the WTI is around 75% -- oil prices took a massive hit this morning because Saudi Arabia announced price cuts earlier today -- about $1.10/bbl for their light sweet crude -- an answer to Iran's massive increase in production.  Looking at the trend line things are that 2016 could easily be a repeat of 2015 -- where oil prices fell all the way to $29/bbl.  

The market has been looking for reasons to sell off from its historical high of 10 days ago.  The collapse of oil prices could provide the "reason" for a sell off.  

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