What We're Reading

Since the beginning of the Industrial Revolution, the world has seen its population and the need for natural resources boom.

As more people and wealth translate into the demand for global goods, the prices of commodities—such as energy, agriculture, livestock, and metals—have often followed in sync.

This cycle, which tends to coincide with extended periods of industrialization and modernization, helps in telling a story of human development.

Why are Commodity Prices Cyclical?

Commodity prices go through extended periods during which prices are well above or below their long-term price trend. There are two types of swings in commodity prices: upswings and downswings.

Many economists believe that the upswing phase in super cycles results from a lag between unexpected, persistent, and positive trends to support commodity demand with slow-moving supply, such as the building of a new mine or planting a new crop. Eventually, as adequate supply becomes available and demand growth slows, the

It’s 2025, and 800,000 tons of used high strength steel is coming up for auction.

The steel made up the Keystone XL pipeline, finally completed in 2019, two years after the project launched with great fanfare after approval by the Trump administration. The pipeline was built at a cost of about $7 billion, bringing oil from the Canadian tar sands to the US, with a pit stop in the town of Baker, Montana, to pick up US crude from the Bakken formation. At its peak, it carried over 500,000 barrels a day for processing at refineries in Texas and Louisiana.

But in 2025, no one wants the oil.

The Keystone XL will go down as the world’s last great fossil fuels infrastructure project. TransCanada, the pipeline’s operator, charged about $10 per barrel for the transportation services, which means the pipeline extension earned about $5 million per day, or $1.8 billion per year. But after shutting down less than four years into its expected 40 year operational life, it never paid back its costs.

When it comes to energy, there is one matter everyone agrees on. For the near future, at least, the world will need more of it—and how it is produced and used will be a critical factor in the future of the global economy, geopolitics, and the environment. With that in mind, McKinsey took a hard look at the data, modeling energy demand from the bottom up, by country, sector, and fuel mix, with an analysis of current conditions, historical data, and country-level assessments. On this basis, McKinsey’s Global Energy Insights team has put together a description of the global energy landscape to 2050.

It is important to remember that this is a business-as-usual scenario. That is, it does not anticipate big disruptions in either the production or use of energy. And, of course, predicting the future of anything is perilous. With those caveats in mind, here are four of the most interesting insights from this research.

Global energy demand will continue to grow. But growth will be slower—an ave

With disruptions fading and Libya now reaching a deal to end their brigade, oils top may be in for now.  This man, however, feels it's going to be a very long road ahead for crude oil bulls.

We’ll start with the obvious: the number one export for many countries here is crude oil or related petroleum products. Middle Eastern countries made up a significant portion of global oil export revenues during 2015 with shipments valued at $325 billion or 41.3% of global crude oil exports.

Saudi Arabia, Iraq, United Arab Emirates, Kuwait, Iran, and Oman were all among the top 15 exporters of crude oil in 2015. Russia and Kazakhstan, countries on the Central Asian part of the map, were also members of that same group.

Regimes in the region found that there were many other corollary benefits from this economic might. Unrest could be stifled by rising wealth, and these countries would also have more influence than they otherwise would in global affairs. Saudi Arabia is a good example in both cases, though a major driver of Saudi influence has been slipping in recent years.

Outside of Oil

Aside from exports of oil, there are some other interesting subtleties to this map. One of the most

When crude oil was stopped by it's 200 month simple moving average in June, I wrote here that this posed a problem for the energy sector.  We analyzed rig counts and even questioned here if the Saudis had it wrong.  I had already posed here that there would be no recovery in 2015 and we should be fearful of the nasty word "deflation" here and it doesn't appear I was wrong.  Who's feeling the most pain from these prices?  We took a look here as these countries could pose good buying opportunities down the road.  What's being said now on crude oil's recent drop in price is even more interesting.....at least until there's a disruption in supply or the Saudi's change their mind.

Back in January, Morgan Stanley drew similarities between the current oil crash and the one in 1986— when oil prices fell 45%.  Though they have been making these parallels for six months, analysts are now saying that the current crash could fare even worse.  "On current trajectory, this downturn could become wor

Received this SoberLook email from member Ryan and had to chuckle.  Did oil bulls (who are always drooling at the mouth) truly feel OPEC would cut production at some point to satisfy their desire for higher pricing?  Come on.  How much can the U.S.consumer handle with new jobs created at the low end of the scale?  What would happen with $5 gas gasoline?  Carpools would become all the rage here in my locale. At a time when the U.S. consumer needs money to spend, the impact of higher oil would be the last thing we need.

With low oil, the weak will fail and M&A will continue in the crowded space.  Let new technology force cost savings (as we're seeing it every where else) and bring O&G production up to 21st century standards.  I've written about it several times and I think the Saudis knew it was time.

In 2014 the Saudis could no longer accept the loss of crude oil market share as the North American production levels shot up sharply over a three-year period.

Source: Yardeni Researc

Had to share this monthly chart of crude oil because I am one that has viewed it bearishly since it broke it's 200 month sma; prior support during the financial crisis. (click chart to enlarge)

Blame it on fracking.  Blame it on OPEC.  Blame it in fuel efficient cars.  Blame it on whatever you wish but just because it was bullish for years, does not mean it will always be the same.

Natural gas has been embraced by the U.S. and continues to grow.  Coal is all but dead; being dropped by one country after the next.  There obviously is no U.S. oil shortage (thank you Bakkens) and our dependency on overseas oil becomes less with each passing day.

Yes they have shut down rigs to cut back on the oversupply but (imo) barring any disruption in production, I see this years move in crude oil as nothing more than back-n-fill.  The 200 month is an interesting overhead obstacle.  And that strong U.S. Dollar?  No, that not going to help it either (again barring a disruption).

It's not a bear mark

Life has intervened of late however I felt I would post my random thoughts viewing my port yesterday:

• Russia is still working. RSX at it’s 100d today. I will add more if it comes back to the 50d http://screencast.com/t/Eh88iqLP   Long hold, definitely.  Throw it in a drawer and forget about it.

• Buffet lowered his XOM stake and bought DE.  DE Monthly sure looks like its coiled up for something. Buffet obviously thinks new all time highs http://screencast.com/t/rlyFa0yzLeb  DE earnings this Friday bmo. I'd be long common and get put protection.  Buy or add on any selloff.  Daily view, bouncing off that 50% fib (to me) equals good chance it wants to challenge/break the high http://screencast.com/t/oEgnCfo0SJg 

• I still like the consumer stapes sector here. XLP or one of its components. They come into seasonal demand next month thru Summer.   I'm already long PEP and KMB as mentioned here previously in Chat.  For a list of XLP components, visit http://etfinvestmentoutlook.com/etf_hold

As the latest Baker Hughes rig count continues to plummet with the collapse in oil pricing some are still trying to catch a bottom.

Total Rigs down to 1633
Down -43 or -2.6% compared to last week
Down -144 or -8.1% year-over-year

Gas seems to be shuttering more than oil and inland waters more than land or offshore.

With many pundits forecasting crude to remain low for a few years (barring disruption in supply) this will be interesting to monitor going forward.

With Schlumberger (SLB) to layoff 9000 and Baker Hughes (BHI) to layoff another 7000, this is only the tip of the iceberg.

Data courtesy of Baker Hughes

Click charts to enlarge

Dick Evans, chairman and CEO of San Antonio based Cullen Front Bank (CFR) made the rounds in December chatting with CNBC in an effort to reassure investors that the low price crude oil was only temporary and would not translate into a revisiting of the bloodbath of the 1980's, however their chart says that investors aren't drinking the koolaid.  (chart right - click to enlarge)

The same investor fear can be seen in southern lender BOK Financial which operates in Oklahoma, Texas, New Mexico, Northwest Arkansas, Colorado, Arizona, and Kansas/Missouri. (chart below - click to enlarge)

I believe that barring an OPEC cut in production or some outside supply disruption, crude will NOT recover in 2015 as explained in this post.   Is this what these bank charts are hinting at?

The next question is if these banks begin to see defaults in oil and gas names, just how many dominos lie behind in the high-yield bond financial trail.  As Becky Quick points out, hedging only lasts for so long so i

While guests on CNBS CNBC and Bloomberg are busy encouraging you to buy oil names which are down over 50%, I wouldn't expect to reap any big rewards any time soon.  In fact I believe there will be much more pain ahead, depending on the strength of the company you chose.  Iran sanctions may be giving it a boost near term but once they're lifted (or eased) their production is expected to double which is once again, bearish for this oversupplied market

While everyone is in agreement that crude oil is in a bear market, quite often one strategy is to buy the laggard and anticipate it to outperform the following year.  The trouble with crude oil however, are the fundamentals.

1. U.S. consumer Demand (figure 1)  Consumption has been dropping since 2000 thanks to more fuel efficient autos and younger Americans (millennials born from 1980 to early 2000s) being drawn to work in and the lifestyles of large metropolitan areas.  Baby boomers (born 1946-1964 or 51-69 years of age) will contribute

Russia's central bank raised interest rates last Friday from 9.5% to 10.5% in an effort to support the falling currency and battle inflation.  When that did nothing, they shocked markets by raising it again overnight from 10.5% to a whopping 17% in what some are calling an emergency move.  This was their sixth interest rate hike this year to support the currency.

The central bank early on Tuesday also increased the maximum volume of foreign currency it provides to Russian banks via its foreign-exchange repurchase agreement auctions for 28 days to $5 billion from $1.5 billion.

Sadly the RUB/USD barely moved. (left image - click to enlarge)

Russia's economy still depends in large measure on sales of oil and gas, which account for about two-thirds of exports, despite liberal policymakers calling for structural economic reform for years.

That means swings in global oil prices have a significant impact on Russia's balance of payments, and therefore the rouble exchange rate.  This will c

I have to throw a flag in from the sidelines calling foul on the learned men on CNBCs Fast Money table Friday (video below) as traders remain bullish on the big screen.  In fact, they do not believe crude's fall will impact our rally.  Really?  Josh Brown stated there was no correlation b/w the price of oil and the S&P500 and did their level best to downplay the selling in crude oil.  Alright, overlay a comparison chart (left) and you won't see black gold having an enormous impact on the market with a few exceptions BUT, the energy complex represents an average of 6.9% of U.S. GDP. 

If it's a bear market, this changes the scenery.  Come on Josh; there's much more that you're not saying and we know it.  Stay with me here.  So typically if we saw a ten percent correction in crude, another sector in the S&P would merely step up to the plate and help lead such as tech or financials.

This time, however, we see regional banks such a Cullen-Frost (who lend to oil names down here in Texas fo

You'll hear "reverting to the mean" or "mean reversion" bandied about occasionally however not on a daily basis......unless you're watching gold's long sell off since it's explosion to the upside.  According to Investopedia, mean reversion is:

A theory suggesting that prices and returns eventually move back towards the mean or average. This mean or average can be the historical average of the price or return or another relevant average such as the growth in the economy or the average return of an industry.

Case in point is my theory that commodities are/have been doing just that.  Click on this long term chart of the CRB Index for a better view.

After decades trading in a wide range, commodities took off as the dotcom bubble broke in 2000.  Money had to go somewhere, didn't it?

But with a weak economy worldwide and no shortage of supply in grains or crude oil, just how low commodities will go is anyone's call at this juncture.

It's been bandied about a great deal lately so I thought I would post these graphics from CNBC to make things simpler to understand.  Clearly some drilling projects require higher prices to remain profitable while others, maybe not so much.  To explain a little on the price spreads, it all comes down to "when" each project was established where older ones may be require updating technology speaking and higher maintenance costs where newer ones are utilizing higher-tech equipment and can operate at a lower price on oil to break even.   Cost is also affected by how deep they have to drill to reach oil and how many barrels per day it puts out versus how much you invested in the well.  Clearly Saudi Arabia has the advantage but as they do, they drain their cash reserves (as does everyone else).

After Friday's spectacular 10% sell off in black gold, I went back to my earlier post on shorting crude oil and felt pretty darn good as I made myself a turkey sandwich for lunch.  Some would say it was a capitulation bottom but I just didn't see the volume which would come with such a move.   Yes there was heavy selling but it was funds getting OUT of energy names and forced selling - not buying a dip.  Sure, it can snap back and a near term bottom is most likely in but I will not be trading that.  The top is in in my opinion.  I will view any move higher (without an event risk occurring) as an opportunity to re-short at a higher level.

I still believe the entire sector is extremely over crowded with over 100 oil companies just in the U.S. alone.  While deflation in any sector is difficult to swallow, I may not be too far from the truth.  According to the WSJ:

Energy stocks are on sale following a five-month plunge in crude oil, but so far few investors are heeding the temptation