Courtesy of Lance Roberts of STA Wealth Management
This past week I have been inundated with questions regarding the dive in crude oil prices and the energy sector in general. Is this a fantastic buying opportunity, or is the bigger of something bigger? The answer depends on your time frame.
For a speculative trader looking for a short-term opportunity, as shown in the chart below, oil is now 4-standard deviations oversold and a fairly strong bounce is likely.
However, longer-term investors may want to use whatever bounce comes to rebalance energy weightings in portfolios as it is quite likely that the dynamics of the oil/energy market have now markedly changed going forward. As I discussed recently in "No, It's Not Time To Buy Oil Stocks Yet," the longer-term investment opportunity in energy has occurred after the initial bounce. To Wit:
"As you will notice, each time there is a sharp correction in the NYEI, the subsequent bounce has been an opportunity to sell positiions that are underperforming, experiencing credit related issues or were just poor investments to begin with. Strongly rising markets mask many investment errors made by investors that are quickly, and brutally, revealed during market declines. These bounces give investors opportunities to clear those mistakes.
The subsequent decline provided an ideal opportunity to reallocate portfolios to better quality and performing issues within the portfolio. The current sell-off is likely the first leg of a similar pattern that investors should use to clean up portfolios in energy related investments."
This weekend's reading list is a collection of articles discussing the good, the bad and the ugly of the dive in crude oil prices. It will likely be some time before we know how this particular story ends, but it is a story that is particularly important to Houstonians that have enjoyed oil-driven economic boom for the last five-years.
1) 10 Reasons Why A Severe Drop In Oil Prices Is A Problem by Gail Tverberg via Our Finite World
- Low prices lead to oil being left in the ground
- Low prices negatively impact shale extraction and offshore drilling
- Shale operations have a huge impact on US Employment
- Low oil prices lead to debt defaults
- Low oil prices can lead to collapses of exporters
- Benefits to consumers likely smaller than expected
- Hope for exported oil and LNG likely to disappear
- Hoped for renewables lose luster with low oil prices
- Deflationary pressures
- Drop in oil prices likely reflective of world reaching debt expansion limit
Read Also: Oil & Banks – As Prices Fall Risks Rise by John Schoen via CNBC
2) Energy Bond Risk Soars To Record Highs via ZeroHedge
"The spread (or risk) of high-yield energy credits surged again today, breaking above 850bps for the first time… The overall high-yield credit market is being dragged wider by this contagion as hedgers try to contain the collapse that is possible. For now, the S&P 500 remains entirely ignorant of the fact that over a third of its CapEx was expected to come from this crushed sector."
Read Also: Why The Stock Market Is Detached From The Economy via Streettalklive
Read Also: Guess What Happened The Last Time Oil Crashed Like This by Michael Snyder via Conscious Life News
3) Why The Oil Price Decline Is Not A Bad Thing by David Rosenberg via The National Post
"Mr. Rosenberg said the stiff drop in oil prices this year has resulted in U.S. gas prices falling US26¢ to US$2.88 per gallon from US$3.14 a month ago. That, he said, is equivalent to a US$40-billion tax cut that will benefit various sectors including transportation, energy-dependent manufacturers and segments of the consumer discretionary space such as restaurants, electronics, and music and book stores."
Read Also: Why Bottom Falling Out Of Oil Isn't All That Bad by David Rosenberg via The National Post
4) Recession Is The New Stimulus by Jeffrey Snider via Alhambra Partners
"At this point the idea of 'decoupling' enters as if it were valid today in a way it was totally absent in 2008 (the last time “decoupling” was so prevalent). In other words, the global economy may be sinking but the US is supposed to be the bright shining light of contrary good fortune. Thus, less demand around the world is expunged from the domestic trend of rising production and scenarios of import price competition. Of course, I think that is nothing more than the same wishful thinking that drove the 2008 version, but also that it is plainly obvious that emerging market demand for energy is a full part of the lack of forward demand up the supply chain. China may be slowing, but it’s not because China is slowing on its own, rather the US is buying a lot less from China (and everywhere else).
GDP is a spreadsheet or regression with variables to be moved around and nothing more to 'economists.' How else can you arrive at the idea that rapidly gaining bearishness in markets with trillions and trillions on the line is now the go-to 'stimulus?' Maybe the global economy, including the US, will get so bad it will be positively booming."
Read Also: Oil Price Drops – Don't Panic, Really by Cyrus Sanati via Fortune
5) Steep Slide In Oil Prices Is Blessing For Most by James Stewart via The New York Times
"The plunge in oil prices — to about $66 a barrel from over $107 in late June — has many pundits wringing their hands. They have cited the risks of falling prices and social and political unrest overseas, not to mention the economic threat to the booming mid-American oil basin, running from Texas to North Dakota and Alberta.But if history is any guide, it’s hard to see falling oil prices as anything but good news for everyone whose fortunes aren’t tied to oil, which is to say, most of the world’s population."
Read Also: Plunging Oil Prices Will Starve The World Of Economic Fuel by Chris Martenson via MarketWatch
Read This: Dollar Surge Endangers Global Debt Edifice Warns BIS by Ambrose Evans-Pritchard via The Telegraph
"The BIS has particular authority since its job is to track global lending. It was the only major body to warn of serious trouble before the Great Recession – and did so clearly, without the usual ifs and buts.It now warns that the world is in many ways even more stretched today than it was in 2008, since emerging markets have been drawn into the global debt morass as well, and some have hit the limits of easy catch-up growth."
"Let me tell you something that we Israelis have against Moses. He took us 40 years through the desert in order to bring us to the one spot in the Middle East that has no oil!" – Golda Meir
Have A Great Weekend
