Perhaps the biggest surprise of 2014 is the collapse of oil prices. In June crude was around $110/barrel. At one juncture yesterday, prices were around $65/barrel following a 2 day 10% plunge, the result of the OPEC meeting where production was not cut.
This massive 2 day decline in crude was perhaps exacerbated by thinned trading ranks because of the Thanksgiving holiday.
As recent as July the consensus view was for oil to trade between $90 and $110 barrel with an average price of $100, essentially the range following the collapse of the financial system in 2008-09.
Some are suggesting oil will continue to decline, referencing 1986 as the benchmark year where prices collapsed about 60%. Oil is down about 40% in six months. Will this occur?
The hype is intense but will again write the vast majority of oil’s decline occurred before October 15. The drop from $75 to $65 was a two day affair. Was there capitulation? Oil did close $3 higher.
The geopolitical and geostrategic impact of the current decline could be infinite. To write the incredibly obvious, the high cost producers, the producers in the lesser developed nations and the producers who require western technology could face great difficulty.
Will unrest accelerate in many producers’ societies for as all know a significant amount of production occurs in volatile regions? Economic shortfalls are the major catalyst for civil unrest, anarchy and regime change.
There will be winners and losers and I will write the countries/companies that have adopted western style government will survive and prosper at the expense of others. If history is of any guide, the potential geopolitical/geostrategic unraveling could potentially rapidly occur.
The over used phrase “the velocity of change is frightening” is echoing loudly. I reiterate, other than a few outliers, who thought oil would fall to a five and half year low in four months?
Commenting about yesterday’s market activity, stocks fell weaker than expected Black Friday sales and disappointing Chinese manufacturing data.
However treasuries also declined in price for the opposite reason…domestic manufacturing data that exceeded expectations and a Federal Reserve official commenting the drop in oil should boost the economy.
Today’s trading may be driven by headline given the dearth of data scheduled to be released.
Last night the foreign markets were up. London was up 1.19%, Paris up 0.18% and Frankfurt down 0.11%. Japan was up 0.42% and Hang Sang up 1.23%.
The Dow should open nominally higher on speculation China will lower interest rates further to stimulate its economy and the decline in oil prices is reflationary in the US that may permit a “three handle” in GDP. The 10-year is up 1/32 to yield 2.23%.