July 29th 2016 Market Minute
Dow Jones Industrial and SP 500 were both relatively flat week over week. The NASDAQ Composite, however, hit its highest level all year propelled by some Technology Company earnings reports.
Interest Rates on Sovereign Government Bonds, both in and outside the US, were also relatively flat week over week too, yet just of record low yields from earlier this month.
The US Economy’s GDP grew at 1.2% in the second quarter, below the 2.6% consensus of Economist surveyed by the WSJ. The US economy grew at .8% in the 1st Q of 2016, and .9% 4th Q of 2015. For all of 2015 US GDP growth was 2.6%. The US GDP is on track to grow only 1% for 2016.
- Oil this week is a different story. It is now officially in a ‘Bear Market’, i.e. down 20% from it’s high earlier this year.
- Oil continued it’s slow decline this week dropping below $42 per barrel for the first time in three months.
As it has through history, Oil’s price has been most impacted by ‘Demand’ and ‘Future Demand Growth’. When South East Asia was experiencing Capital Outflows and Currency Devaluation (Asian Contagion) in 1998 Oil dropped from over $40 to under $10 per barrel. At the height of economic fears in 2009 Oil dropped from over $140 to under $40.
The more recent decline in Oil from over $100 in 2014 to under $28 earlier this year was not based on a ‘fear’ of a reduction in Demand and Future Demand Growth, as it has historically. Instead the decline was due to an Oil Boom in the US over the last 10 years. Our amazing country “TRIPPLED”, that’s right, 3X, our Oil production over this period. Powered by technology (Fracking) and finance (Low interest rates, MLP IPO’s, ect).
Global Demand for OIL is about 100 Million Barrels per day. OPEC produces about 30 Million of this, and has done about the same amount for many years. (Quota Cheating excluded). The US is now producing about 8 Million but was producing almost 10 Million just last year. The US OIL production growth that we experienced over this period peaked in 2015 and has since flattened due to the Oil price decline.
The US, (Canada a little bit too), have become the worlds ‘Swing Producer’. i.e. Oil Prices go up and the US increases production, prices go down and the US decreases production. i.e. Rig Count Peaked at 1,600 in 2015 and is now down to 374. Basic Economics. Supply and Demand with Price playing the role it should in the “Free Market”. OPEC, by definition as a ‘Cartel’, used to fill this role but does not any more. No OPEC members, nor large non-OPEC members (Russia, Brazil) reduced its production during this decline. The reason the lower price didn’t reduce their production is because these countries cannot afford to reduce production. They are selling as much oil as they can produce at any price. Their Oil Industry is controlled by their respective countries government and they ‘Need’ the revenue Oil brings.
If there are any substantial Global economic challenges like those faced in 1998 or 2009 Oil could drop just as much as it has before. As the New Global Swing Producer (NGSP), the US Oil Industry would be greatly impacted by such a price decline. Don’t worry too much about the US Oil Industry though. They run more ‘efficiently’ than any Oil Industry in the world because they are controlled less by our Government than other governments control theirs. The US Oil Industry, as they have in the past, will cut production and cut cost becoming even leaner and more efficient if the lower price of Oil warrants it. Some Smaller Oil Companies may go out of business but the ‘Diversified’ US Oil Companies will roll with the punches like they have in the past.
A little ‘Technical Analysis” on Oil’s price indicates there is ‘Resistance’ to the upside at around $50. The price ‘floated’ around this level in early 2015 and then could not ‘rally’ much above $50 in the Fall of 2015. The rebound from under $28 went just a little above $50 and has since been declining, albeit slowly. On the down side it looks like there may be some ‘support’ in the high $20’s ($27-$29). Below this there is not enough recent price history if the price were to break through these early 2016 lows. Thus it could go in to the $ teens or even to lows last seen in 1998 ($10). This would be quite extreme, though Oil price to the upside and downside throughout history is sometimes extreme.