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@Scott: See my doctoral dissertation, above, for a lot of "whys".
I think that's part of it, but I think there's a lot going on and a lot of layers, none of them real good (for anyone.) Supply may be one aspect of it, but you're telling me that all the sudden we woke up to oversupply to the degree of something like a 40% drop in the last 6 months or so? If you watch oil, it breaks down, stabilizes and then breaks down again. If it gets much worse, the debt starts to become a more significant issue (and it already has become one - Oaktree has said they are buying distressed energy debt.) I believe energy is one of the largest sectors in the high yield bond index - look at HYG recently.
Hi @scott As to your reference to HYG. This etf did have (have not checked for the past week) 18% of its composition involved in energy debt. The current nasty problem for those invested in high yield bonds is: harmful or undesirable contact or influence; also know as contagion. This sector is taking a whack, too. I have reviewed several hy bond funds where we have been invested previous; and the majority hold 5-8% directly related to the energy sector. Obviously, the small percentages have put downward pressure on the funds; but I suspect some of the downward price pressure is also tied to the down moves related to equity in general. The RSI 14 (relative strength; I know you follow this, too) for HYG and many other hy bond funds is in the 25-30 range on a "daily" basis, and a bit higher on a weekly basis. So, is there more downside; in spite of the RSI being at the edge of oversold? Well, you know I don't know, eh?
Pretty crazy stuff; and hopefully some are not getting their arse kicked with some of this. It is a very good time to review this or that fund or sector or stock to discover reactions over the past few weeks; and into the future, as needed.
There may be some aspect of oversupply, but when you have the drop that we have had, it is a little surprising that we can drop something like 40% in 6 months because we're suddenly aware of oversupply to that magnitude.
We may be trying to put the pressure on Russia, but if that's the case, it harms us and you have states that have gone from booming to probably starting to seem as if they're inching towards bust. I grow concerned if this is the case because we sanction Iran, we try to put the pressure on crude oil to hurt Russia - eventually a cornered country does not go quietly. Or, at the very least, cornered countries turn to new friends and while our relationship with Russia was never warm and friendly, it becomes at what point does the damage to what ties were there become more long-lasting?
I'm also concerned about the debt of energy companies, as the amount of debt behind the "fracking" theme is astonishing and you are already seeing debt become distressed. There is a point where a modest decline in oil is a positive for consumers and some companies. When oil declines again and again and stabilizes only to fall through the floor again, it goes from a positive for the consumer to potentially signaling something broadly negative.
Demand may be a lot less than satisfactory, leading one to believe that the world economies are slowing and/or what growth that has been discussed has been overstated.
The Saudis are trying to pressure competition, which includes Russia and the US and Canada. If this is the case, why now? "Prices now are below what 10 out of OPEC’s 12 members need for their annual budgets to break even, according to data compiled by Bloomberg."
Catch:
"One fund that has been noted again recently is PQTIX PQTDX. On Dec. 10, yesterday; this fund closed down -3.5% and today, closed at +.35%. "
Good stuff Scott. That concern about debt you cite makes me long for Bernanke to return. Say what you will, ... he seemed to sense those kinds of problems earlier than most and work to prevent them. Poking fingers in in the dike, yes - but better than getting drowned.
I have to think that if we ever see oil under 50 --- that by than the stock market (and junk bonds) will have been hammered pretty good as well. It's naive to think you can watch your neighbor's house going up in flames and not get scorched a bit too.
DRILL,BABY,DRILL From Bloomberg Saudi Response “Why should I cut production?” Al-Naimi said to reporters yesterday in Lima, Peru, where he’s attending United Nations climate talks. “This is a market and I’m selling in a market. Why should I cut?” Venezuela wants special discussions to be held before the group’s next scheduled gathering on June 5, Foreign Minister Rafael Ramirez said on the Telesur network yesterday. The upfront cost of contracts to insure Venezuelan debt against non-payment for five years has jumped to 60 percent, pushing the implied probability of default to 94 percent, the highest in the world.
“Our position on OPEC is that they defend the fair price of our oil,” Ramirez said. “We don’t believe in the free market. We must make an effort to reduce overproduction of oil.”
Linked from The only hope for the industry in the near term is Saudi Arabia making an about-face from its position in Vienna in November. With oil prices nearing $60 per barrel, all eyes are on OPEC’s de facto leader. But the Saudi Oil Minister poured cold water on that possibility on December 9. “Why should I cut production?” Ali Al-Naimi said told reporters in Lima, Peru, according to Bloomberg. “This is a market and I’m selling in a market. Why should I cut?” By Nick Cunningham of Oilprice.com http://oilprice.com/Energy/Crude-Oil/Big-Oil-Slashing-Spending-Amid-Low-Prices.html
Elsewhere: The free fall in oil prices is roiling markets. There are near-term benefits of lower energy prices, but darker clouds are gathering for the global economy. CIO Commentary by Scott Minerd DECEMBER 11 2014 What’s to be made of the oil roil? Well, the obvious first order effect is gasoline prices will head even lower, which is a healthy sign for holiday retail sales and the U.S. economy in general. This is the bright side of lower energy prices, but there is a dark side as well. The decline in oil prices reflects not just oversupply, but shrinking global demand due to economic malaise in Europe and Asia. The grim situation in Europe means we are likely to continue to see downward pressure on energy prices and commodity prices, including copper and other industrial metals. http://guggenheimpartners.com/perspectives/macroview/oil-roil-and-turmoil
@expatsp said:The data out of the US has been quite good.
Not so good in other countries may be a concern. India Industrial output, on the other hand unexpectedly contracted. Consumer price or retail inflation in November eased to a record low of 4.38 per cent from 5.52 per cent in October, but industrial output in October fell sharply by 4.2 per cent in October, government data showed on Friday. A cooling off in food prices accompanied by a sharp drop in global crude oil prices and high base effect contributed to the fall in inflation, analysts said. With growth struggling at 5.3 per cent in the July-September quarter, it is likely to be some time before the country recaptures the 8 per cent growth levels needed to create enough jobs for a rapidly expanding workforce, analysts say http://profit.ndtv.com/news/economy/article-inflation-eases-to-record-low-of-4-38-in-november-712049
2015: A Pivotal Year Annual Outlook Edition by Diane Swonk, Chief Economist, Mesirow Financial CHICAGO, December 10, 2014 – In the December issue of Themes on the Economy®, Mesirow Financial's Chief Economist is optimistic about the year ahead, quipping, “Economic expansions are like fine wines: They improve with age.” Diane Swonk predicts that the biggest boost will come from the U.S. consumer who will finally have more cash in hand. “Consumer spending is expected to be a primary driver of gains with a reacceleration in wages finally adding to the income created by rising employment and falling prices at the gas pump. An increase in the minimum wage across almost half of the states virtually ensures a pop in wage growth in the first quarter.” Her forecast also includes modest wealth effects from improving home values and stock market gains. We are in unchartered waters with respect to the stock market. No one knows exactly how markets will react to a shift in monetary policy next year. The only thing we do know is that Fed officials are even more worried than most market participants about triggering a disorderly correction. They will do all that is possible, including delaying liftoff, to ensure a smooth transition https://www.mesirowfinancial.com/economics/swonk/themes/themes_1214.pdf
It seems to me the big question is whether this is just about commodities -- a mix of oversupply, weak demand, and markets overshooting -- or whether this commodities downturn is a leading indicator that the world economy is tipping back into recession. I'm guessing the former, but it's just a guess, though I'm investing based on it and assuming these commodities names will recover in a year or two. The data out of the US has been quite good.
It seems to me the big question is whether this is just about commodities -- a mix of oversupply, weak demand, and markets overshooting -- or whether this commodities downturn is a leading indicator that the world economy is tipping back into recession. I'm guessing the former, but it's just a guess, though I'm investing based on it and assuming these commodities names will recover in a year or two. The data out of the US has been quite good.
The question for me is - at what point are some names trading at recessionary levels? I mean, CLR is $32. It was $75 a couple of months ago. All of the oil rig names have been obliterated. NOV is down heavily, a company I like in Canada called Gibson Energy has gone from $34 to $21 in a couple of months. The Exxons of the world are down, certainly, but some of the more aggressive/volatile names are down massively.
Given the problems they've had with Highmark (which they had to sell at a loss), Boardwalk (which has come back a little bit but is still a weak MLP) and Diamond Offshore, I'm surprised Loews (L) hasn't done worse.
The thing is, a lot of these oil companies have done nothing wrong. They are guilty by association. If this does turn around they would be the ones to recover nicely unless they go out of business first.
The best cure for low oil prices is low oil prices. People behind the curtains are turning the dials as we speak. When wells come up for maintenance. They will be shut down rather than PM'ed or modified and capped off. I think cheap oil will end sooner than later. Industrial products made from oil have not come down as much as gasoline. Even the spreads on higher grades of gasoline have widened some. Maybe it's an existing inventory problem. I don't Know
10 drill rigs less than this time last year in operation.
Sectors go through this rotation all the time, from in to out of favor. Does anyone really think it's different this time? Are you still heating your home? Still driving? Is stuff still being transported? Are oil and gas still being used? The only thing that hasn't gone down is the energy related excess fees airlines charge. Bottom line, Delphi is right and this is temporary..
Comments
(Ooops. I guess he did in response to OJ. Thanks. Sorry I missed it.)
Remember: "Why" is not an option... I come here for answers!
I don't think we'll see that "4" - But if we do, I'm backing up the truck to the loading gate.
Hi Scott- yep, that's for sure. Games within games, wheels within wheels.
As to your reference to HYG. This etf did have (have not checked for the past week) 18% of its composition involved in energy debt. The current nasty problem for those invested in high yield bonds is: harmful or undesirable contact or influence; also know as contagion. This sector is taking a whack, too.
I have reviewed several hy bond funds where we have been invested previous; and the majority hold 5-8% directly related to the energy sector. Obviously, the small percentages have put downward pressure on the funds; but I suspect some of the downward price pressure is also tied to the down moves related to equity in general.
The RSI 14 (relative strength; I know you follow this, too) for HYG and many other hy bond funds is in the 25-30 range on a "daily" basis, and a bit higher on a weekly basis. So, is there more downside; in spite of the RSI being at the edge of oversold? Well, you know I don't know, eh?
Pretty crazy stuff; and hopefully some are not getting their arse kicked with some of this. It is a very good time to review this or that fund or sector or stock to discover reactions over the past few weeks; and into the future, as needed.
Thank you again, scott; for your thoughts here.
Catch
We may be trying to put the pressure on Russia, but if that's the case, it harms us and you have states that have gone from booming to probably starting to seem as if they're inching towards bust. I grow concerned if this is the case because we sanction Iran, we try to put the pressure on crude oil to hurt Russia - eventually a cornered country does not go quietly. Or, at the very least, cornered countries turn to new friends and while our relationship with Russia was never warm and friendly, it becomes at what point does the damage to what ties were there become more long-lasting?
I'm also concerned about the debt of energy companies, as the amount of debt behind the "fracking" theme is astonishing and you are already seeing debt become distressed. There is a point where a modest decline in oil is a positive for consumers and some companies. When oil declines again and again and stabilizes only to fall through the floor again, it goes from a positive for the consumer to potentially signaling something broadly negative.
Demand may be a lot less than satisfactory, leading one to believe that the world economies are slowing and/or what growth that has been discussed has been overstated.
The Saudis are trying to pressure competition, which includes Russia and the US and Canada. If this is the case, why now? "Prices now are below what 10 out of OPEC’s 12 members need for their annual budgets to break even, according to data compiled by Bloomberg."
Catch:
"One fund that has been noted again recently is PQTIX PQTDX. On Dec. 10, yesterday; this fund closed down -3.5% and today, closed at +.35%. "
Distribution?
I have to think that if we ever see oil under 50 --- that by than the stock market (and junk bonds) will have been hammered pretty good as well. It's naive to think you can watch your neighbor's house going up in flames and not get scorched a bit too.
Yes...........my bad.
Pimco did distributions on the 10th, as we had one here, too.
More chocolate, please; to help the gray matter.
From Bloomberg
Saudi Response
“Why should I cut production?” Al-Naimi said to reporters yesterday in Lima, Peru, where he’s attending United Nations climate talks. “This is a market and I’m selling in a market. Why should I cut?”
Venezuela wants special discussions to be held before the group’s next scheduled gathering on June 5, Foreign Minister Rafael Ramirez said on the Telesur network yesterday. The upfront cost of contracts to insure Venezuelan debt against non-payment for five years has jumped to 60 percent, pushing the implied probability of default to 94 percent, the highest in the world.
“Our position on OPEC is that they defend the fair price of our oil,” Ramirez said. “We don’t believe in the free market. We must make an effort to reduce overproduction of oil.”
Shale Oil
Production in the U.S., the world’s largest oil consumer, expanded to 9.12 million barrels a day through Dec. 5, the Energy Information Administration reported yesterday. That’s the fastest rate in weekly records that started in January 1983, according to the Energy Department’s statistical arm.
http://www.bloomberg.com/news/2014-12-11/wti-trades-near-61-as-saudis-question-need-for-production-cut.html
Linked from
The only hope for the industry in the near term is Saudi Arabia making an about-face from its position in Vienna in November. With oil prices nearing $60 per barrel, all eyes are on OPEC’s de facto leader. But the Saudi Oil Minister poured cold water on that possibility on December 9. “Why should I cut production?” Ali Al-Naimi said told reporters in Lima, Peru, according to Bloomberg. “This is a market and I’m selling in a market. Why should I cut?”
By Nick Cunningham of Oilprice.com
http://oilprice.com/Energy/Crude-Oil/Big-Oil-Slashing-Spending-Amid-Low-Prices.html
Elsewhere:
The free fall in oil prices is roiling markets. There are near-term benefits of lower energy prices, but darker clouds are gathering for the global economy.
CIO Commentary by Scott Minerd DECEMBER 11 2014
What’s to be made of the oil roil? Well, the obvious first order effect is gasoline prices will head even lower, which is a healthy sign for holiday retail sales and the U.S. economy in general. This is the bright side of lower energy prices, but there is a dark side as well. The decline in oil prices reflects not just oversupply, but shrinking global demand due to economic malaise in Europe and Asia. The grim situation in Europe means we are likely to continue to see downward pressure on energy prices and commodity prices, including copper and other industrial metals.
http://guggenheimpartners.com/perspectives/macroview/oil-roil-and-turmoil
@expatsp said:The data out of the US has been quite good.
Not so good in other countries may be a concern. India Industrial output, on the other hand unexpectedly contracted.
Consumer price or retail inflation in November eased to a record low of 4.38 per cent from 5.52 per cent in October, but industrial output in October fell sharply by 4.2 per cent in October, government data showed on Friday. A cooling off in food prices accompanied by a sharp drop in global crude oil prices and high base effect contributed to the fall in inflation, analysts said.
With growth struggling at 5.3 per cent in the July-September quarter, it is likely to be some time before the country recaptures the 8 per cent growth levels needed to create enough jobs for a rapidly expanding workforce, analysts say
http://profit.ndtv.com/news/economy/article-inflation-eases-to-record-low-of-4-38-in-november-712049
2015: A Pivotal Year
Annual Outlook Edition
by Diane Swonk, Chief Economist, Mesirow Financial
CHICAGO, December 10, 2014 – In the December issue of Themes on the Economy®, Mesirow Financial's Chief Economist is optimistic about the year ahead, quipping, “Economic expansions are like fine wines: They improve with age.” Diane Swonk predicts that the biggest boost will come from the U.S. consumer who will finally have more cash in hand. “Consumer spending is expected to be a primary driver of gains with a reacceleration in wages finally adding to the income created by rising employment and falling prices at the gas pump. An increase in the minimum wage across almost half of the states virtually ensures a pop in wage growth in the first quarter.” Her forecast also includes modest wealth effects from improving home values and stock market gains.
We are in unchartered waters with respect
to the stock market. No one knows exactly
how markets will react to a shift in monetary
policy next year. The only thing we do know
is that Fed officials are even more worried
than most market participants about
triggering a disorderly correction. They will
do all that is possible, including delaying
liftoff, to ensure a smooth transition
https://www.mesirowfinancial.com/economics/swonk/themes/themes_1214.pdf
Given the problems they've had with Highmark (which they had to sell at a loss), Boardwalk (which has come back a little bit but is still a weak MLP) and Diamond Offshore, I'm surprised Loews (L) hasn't done worse.
10 drill rigs less than this time last year in operation.
https://www.dmr.nd.gov/oilgas/riglist.asp
Just my 2 cents.