Oil is around three month lows. Oil stocks, according to Bloomberg are the worst performing shares in the world. While I do not know whether or not this is an accurate statement, being long oil it certainly feels like they are indeed the worst performing shares.
Bloomberg writes oil is now beginning to attract interest given that dividend yields are now the highest since the financial crisis of 2008-09. The yields greatly eclipse that of the S & P, the vast majority of bonds, offering an alternative to most over priced yield alternatives. Additionally valuations as compared to the S & P are at the greatest discount since at least 1992.
The collapse of crude has hurt oil profits with median income of the 15 largest integrated oil companies down 45% in the first quarter from a year earlier. The question at hand will dividends of the oils be reduced or will cap expenditure budgets be slashed?
Bloomberg writes in the oil collapse of 1986, oil reduced cap expenditures by 25% but the dividends were largely maintained. Bloomberg writes that today companies will have to lower costs by 20% to maintain dividend payouts.
The slashing of costs would center upon exploration and development, a reduction that commenced during the first quarter. Such cuts should lower production and stabilize prices and offer confidence that the dividends are indeed sustainable.
Perhaps the only concrete statement to make about the oil implosion is the negative narrative is bordering as myopically manic. Typically a bottom or top is made when there is only one intense narrative.
As noted yesterday, most of Wall Street is ignoring that Middle Eastern countries also are affected by the laws of economics. Is a change at hand, partially predicated by valuations amplified by sentiment?
If history is to serve as a guide, yes.
Last night the foreign markets were mixed. London was down 0.12%, Paris up 0.10% and Frankfurt down 0.30%. Japan was up 0.25% and Hang Sang up 1.0%.
The Dow should open flat. The 10-year is unchanged at a 2.35% yield.
