December typically brings a “Santa Claus” rally for stocks, but we’ve yet to see it this year.
Oil is in a bear market and taking the rest of the market with it. The last five months came as a shock to the oil markets, and it’s having its effect across the board. Precious metals took another hit today after having a nice rebound after almost touching $59 overnight, WTI crude has collapsed back to a $55 handle, smashing the Ruble lower and high-yield credit spreads higher. US financial stocks are starting to weaken back towards the credit market’s warnings as counterparty risk concerns spread…
Demand for OPEC’s Oil
Demand for OPEC’s oil has eroded as other countries, including the United States, have stepped up production. The decline in the price of oil accelerated after the Energy Department reported that domestic oil inventories had increased by 1.5 million barrels last week. This increase in inventory adds more downward pressure to the price of oil. The questions will be if the U.S. will be able to continue producing at current levels if prices are below $60 dollars a barrel. Estimates have it that shale oil production is not profitable under $75 per barrel, which might be a huge blow to the shale oil companies if we see prolonged depressed crude oil prices.
“The slide in oil has been pretty dramatic,” said Randy Frederick, managing director of trading and derivatives with the Schwab Center for Financial Research. “There is an overreaction to these lower energy prices, which is what we seem to be seeing right now, where it becomes more panic selling.”
The Shale Boom
The shale boom that has occurred in America has been a threat to other oil producing nations considering America has not had to import as much oil from other countries, and has been able to add supply to the market which has eased the price of gas around the world. To combat this, Saudi Arabia actually wants the price of oil to go low enough that American producers in the newly drilled shale basins aren’t making any money. They might then stop flooding the market, giving Saudi Arabia back its position as the world oil leader.
Saudi Arabia’s tactics are working, too. The US Energy Information Administration (EIA) recently reduced its forecast for production growth in 2015 by 100,000 barrels a day.
The fact that there is more money in the pockets of consumers, because of lower gas prices, is actually not helping the stock market. Logically, it would make sense that Americans will have more money to purchase other goods rather than burn their income at the pump, however, dramatically lower crude oil prices have made investors uneasy.
The Big Moves in the Markets
The big moves in the markets — up or down — generally are a result of an emotional reaction from Wall Street. With the stock market already on egg shells during what has proven to be a volatile 2014, falling crude oil prices could be the final nail in the coffin for the markets before a big correction occurs, and we go back into a official recession. It’s been a while since we’ve had an official recession, and cyclically, we are due.
It will be interesting to see what the Federal Reserve does this week with rate decisions. The resilience of the American economy has prompted investors to speculate that the Federal Reserve will signal this week that it is nearing its first rate increase in more than eight years.
Now with the market volatility starting to spike, I would imagine the Fed would be hesitant to do something that would blatantly throw the market into a downward spiral, which leads me to believe that they will be very cautious as to how and if they will indicate rate increases in the near future. Be prudent with your money and capitalize when things get bloody.
Prosperous Regards,
Kenneth Ameduri
Chief Editor at CrushTheStreet.com