If this is sustained, the global markets will come down with it. Oil still makes the World go around.
What’s interesting is that the discounts on energy related CEFs like PEO have not increased. PEO’s has actually decreased recently. This would indicate capitulation is still to come. Ouch, feel the pain. My head hurts.
But shouldn’t cheap oil be a positive for equity markets generally? It will certainly at a few 10ths to global GDP growth in 2015.
Yeah, all else equal but history doesn’t support that narrative. Makes good headlines though. Even with increased supply, if oil settles below 60 for a while, I would guess that means weakening demand as well, which doesn’t imply economic growth.
putin is going to blow soon
What’s that old saying? Buy when everyone is fearful?
Yea, I think it’s really the time to go long an energy sector ETF and hold it a while. I was looking at vanguard’s energy ETF, it seems the best candidate so far. Anyone know others?
DB
Bought Total SA at 46 € one week ago.
Now trading at around 42 €. Not a fuck given. Certainly a good position to add to a diversified portfolio on a long term basis.
I may load up on some Total myself, one of the best majors I think. That said, I’m stuck with my juniors until they rebound. I’m not selling these now, their value is much greater than the price I’d get. Overall, some folks say oil prices being low will be positive for GDP. They obviously don’t understand GDP. How is disinflation good for GDP? Everyone’s costs declining doesn’t raise GDP, at best it shifts dollars to other sectors, but the total value of goods consumed isn’t improved by falling inputs. Anyway, $5x.xx oil reflects a recessionary global economy. I’ll believe market prices over ivory tower economists any day. If this is truly not a speculative one month price move, we are certainly heading to a recession. There is no way oil is $50 in a robust global economy with China and co running at capacity. Not possible. Dark days.
^^
As a sweetener, a > 5% dividend yield is also pretty orgasm inducing nowadays.
May I ask if you have alot of savings tied up in these oil juniors ?
I don’t understand Geo. If $50 oil indicates we are heading for a recession, why would you load up on Total (or any equity for that matter). I understand it’s likely because you have a long time horizon, but I would think your inclination would be to wait if we are indeed heading for a recession.
Geo,
Those saying its a positive for gdp may be talking in real terms. For me, it’s a tough balancing act trying to decide if the consumer stimulus effect will outweigh negative impact to the energy industry and whether it may be enough to alleviate pressure in Europe.
oil goin down is good for us cuz we consume like 20% of it. let OPEC overproduce, OPEC btw needs price of oil way above 65 to keep a balance budget. us shale will bite the bullet, M&A, and innovate. eventually oil coming up once europe and asia get things going.
But yea geo’s right makes sense that its a shift in dollars from one sector to another. but net net it benefits us cuz we use the majority of it. but heck yea. us shale destabilizing opec. u bet. back in the day, they’d cut production for sure.
^ i believe the “low oil prices is good for GDP” stance mostly has to the short-term gdp transfer from energy producing nations to energy consuming nations as well as the long-term productivity enhancements of more capital and labour going to more productive economies/sectors (e.g. more labour and capital to the U.S. and tech and health care industries and less to the ME and energy industry). it also transfers capital from the coffers of oil producing states into the hands of consumers. if the oil producing states maintain similar levels of spending by taking on debt, world gdp should certainly rise.
further, it is my understanding that the oil and gas industry is not productivity enhancing at all and less capital and labour allocation to that sector is always better. i mean, it has to be better for global gdp if oil sheihks to have less money/power and Buffett/Gates to have more money/power. i can only assume Buffett/Gates are better capital allocators than the oil sheihks.
i’m not an economist and my understanding is surface but i think this is the argument.
On the other hand Buffet mostly invests in secondary markets equity, meaning that the money he spends lands in the hands of another investor.
A Cheikh will use his money to buy a ton of private jets, Range Rovers and Ferraris, hire architecture firms to design wicked buildings, etc.
All this money goes to western firms and produces revenues, profits and employment.
um Buffett/Gates’s wealth goes to charity which in turn goes to cure diseases and reduce poverty and ignorance in third world countries. much more productive than ferraris and endless capacity expansion w/o guarantee of demand. there’s no productivity enhancement in nice buildings but there is clear productivity enhancement in eradicating disease and boosting innovation and reducing poverty, disease, crime, etc.
the key though, is that oil consumers will get a boost and oil producing nations will go into debt to maintain lifestyles thereby resulting in a major net positive in consumption.
my Buffett/Gates comment was more of a joking point but it has some truth. not too much extravagance in Buffett’s life. that’s good for everyone.
These are arguments are sound, but the issue is why is crude soft. If it soft just because of supply, party on. If it soft because demand is declining, watch out. If it is soft just because of speculators, I can understand. The bottom line is with the new supply, drilling must continue for production not to fall of a cliff. The depletion rates of these “new technology” wells are off the historical charts. The supply will dry up as fast as it came on if oil continues lower. The narrative that low oil puts money in the consumer’s pockets can’t really be disputed, but empirical evidence doesn’t show that GDP is inversely related to crude. The opposite actually.
what evidence of this do you have?
from what i see…
the pre-70s was good for U.S. gdp (low oil costs)
the 1970-1984 was pretty terrible for U.S. gdp (high oil costs)
the late 80s and 90s were pretty awesome for U.S. gdp (low oil costs)
2000s were terrible for U.S. gdp (rising oil costs)
U.S. gdp starting to look good (falling oil costs)
i’m not positive about world gdp, but scanning a world gdp growth rate chart, world gdp does tend to mimic u.s. gdp, except in the 2000s due to china and other brics.
Sustained $50 oil means the world is f’d. But I don’t believe this will be sustained. If we are here in six months at these levels, then I will have lost on such a trade, but I think we will be seeing a recession in much of the world if that’s the case.
This summaries my view. A world with oil prices at $50 is not compatible with robust global growth. So its either a speculative scenario which should correct in a few months, or global markets are screwed in the next year.