Welcome to CrushTheStreet.com’s Weekly Market Wrap-Up!
The top story for this edition is the crash in the crude oil market, which has been in a near-unmitigated freefall since late June of this year. West Texas Intermediate, which is the domestic price index for light crude, is down almost 30-percent from January’s opening trade, while the international benchmark, Brent crude, is off a remarkable 35-percent against the same time frame. To put these numbers into perspective, gold bullion, which has experienced enormous volatility since peaking in 2011, is only down one-percent year-to-date.
Erosion in Crude Oil
A major chunk of the recent valuation erosion in crude oil came as a result of OPEC deciding to keep its production level unchanged, which has been standing at a collective ceiling of 30 million barrels per day since 2012. According to a recent article from Bloomberg, Brent crude declined as much as 8.4 percent in the London exchange following OPEC’s announcement, while the futures market slumped the most in more than three years. The reasoning behind the economic cartel’s decision was addressed by Harry Tchilinguirian, head of commodity markets at BNP Paribas, who stated that “OPEC has chosen to abdicate its role as a swing producer, leaving it to the market to decide what the oil price should be,” an opinion that was confirmed by OPEC Secretary-General Abdalla El-Badri.
However, not all members of the oil cartel are in agreement, with perhaps the strongest opposition coming from Venezuela, part of the original five founding nations that created the organization at the Baghdad Conference in September of 1960. As one of only two South American representatives, Venezuela’s spokesperson Rafael Ramirez, underscored his region’s fragile economic constraints when he pushed for a production cut. The country’s currency reserves are close to the lowest point in 11 years, a condition that has not abated since former president Hugo Chavez ordered a reduction in reserves to help fund various social programs, a tactic that was politically motivated as a means to seek reelection. Inflationary policies can certainly boost domestic economic metrics in the short-term, but a reduction in commodity prices would have a negating affect on commodity producers as they would be receiving less value against the dollar for their exports. A similar circumstance is being experienced by Colombia, where oil accounts for more than half of the nation’s exports, according to a separate Bloomberg report. In early November of this year, the Colombian peso fell to its lowest level since July of 2009, with international analysts expecting a further decline in the currency as part of a deliberate strategy to soften the sudden and negative shock of the crude oil decline.
Of course, inflation is a hidden tax that would particularly wreak havoc on middle to lower class families, a condition that the entire Latin American region can ill-afford after suffering various episodes of monetary policy nightmares. It also remains to be seen how patient this region’s oil producers are going to be. Their Middle Eastern counterparts appear to be enjoying a general shift in sentiment, with Qatar being selected to host the 2022 FIFA World Cup. At some point, resentment may rear its ugly head inside one of the world’s most powerful cartels.
Moving onto financial news, the major indices failed to build substantially from last week’s price action, with the benchmark S&P 500 closing at 2,072, while the Dow Jones held steady at 17,900 points. The precious metals complex had a big boost from speculation trading from the Swiss gold referendum early in the week, although gold bullion stalled somewhat at 1,206, while silver managed to push slightly ahead from Wednesday’s trade to close at 16.49. Palladium was the loser this week in the metals complex after failing to breach its 200 day moving average, and settling Thursday at 798. Finally, bitcoin softened this week after another failure to rally to 400 dollars, with the digital currency trading hands at 370 dollars at last count.