Wednesday, October 15, 2014

Oil Is Slip Sliding Away (excerpt)

The weakness in the Energy sector is attributable to the plunge in the price of a barrel of Brent crude oil. It has plunged 27% from this year’s high of $115 on June 19 to $84 yesterday. The ratio of the S&P 500 Energy Index to the S&P 500 is highly correlated with the price of oil. The drop in oil prices is also putting downward pressure on the S&P 500 Industrials sector because the oil industry spends a lot of money on capital equipment. A rebound in oil prices would create a good buying opportunity for both sectors. However, the news remains bearish for oil for now. Consider the following:

(1) Demand. Yesterday, the International Energy Agency cut its 2015 estimate for global oil demand growth by 300,000b/d from its previous forecast and now expects demand growth of 1.1mb/d to 93.5 million. It cut its 2014 estimate by 200,000b/d to 0.7mb/d. Debbie and I have been monitoring the slowdown in the growth of global demand since the start of the year.

(2) Supply. In theory, lower oil prices should boost demand. However, the supply side of the equation may continue to weigh on oil prices. The glut of US shale oil is forcing many OPEC producers to keep producing to hold onto their market share. Even Saudi Arabia may no longer be willing to play the role of the swing producer to boost prices.

On the contrary, the Saudis are hoping that lower oil prices will reduce output in countries with higher production costs. This past Sunday, Kuwait’s oil minister said there was a natural floor limiting how low prices could fall, at about $76-$77 per barrel. That, he said, is near the average production costs per barrel in Russia and the US.

Today's Morning Briefing: The Fear Factor. (1) Going viral? (2) Emotional market. (3) Technicians looking into the abyss. (4) Bad Octobers and good Octobers-Mays. (5) Breaching protocols and support levels. (6) Valuation multiples are depressed and compressed. (7) SMidCaps are much cheaper now, especially relative to LargeCaps. (8) Supply factor depressing oil prices and Energy stocks. (9) Saudis want to shut down high-cost producers in US and Russia with lower oil prices. (More for subscribers.)

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