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Watch Your Financial Steps in 2016

Watch Your Financial Steps in 2016
(Dollar Photo Club)

Wednesday, 23 December 2015 10:35 AM Current | Bio | Archive

In the oil markets, we got a somewhat unusual phenomenon when the price of Brent crude oil, which is the international price marker for crude, at the close quoted below the price of the U.S. price marker WTI (West Texas Intermediate), which hadn’t happened since 2010.

When in 2010, Brent and WTI converged we got the U.S. shale production that got under way, which caused a first stage of oversupply in the U.S. and that afterwards led in 2011 to $20 divergences between Brent, which was the most expensive one, and WTI.

The situation is certainly not as a clear-cut as it was in 2010 because it still remains to be seen how much oil the U.S. will/can start to export now the 40-year old ban of U.S. oil exports has been definitively repealed.

Anyway, the latest forecast of the U.S. Energy Information Administration (EIA) states it now expects U.S. crude oil production to average about 8.8 million barrels per day in 2016, which is down by about 500,000 barrels from the expected 9.3 million barrels per day in 2015.

For investors who have oil on their radar screens, it must be said that a decline of 500,000 barrels of oil per day in 2016 in the U.S., won’t make disappear the existing oversupply of oil while also existing oil stocks, especially within the member countries of  the OECD, are expected to remain at near historical high levels.

Saudi Arabia isn't showing the slightest sign they could cut production anytime soon and Iraq is vowing that it will continue to pump as much as they can because they need the money. Iran, which we shouldn’t forget is OPEC’s second largest producer, has announced it will increase production as soon as the sanctions (related to its nuclear program) are lifted. In Libya, when the U.N.-brokered peace deal between the main warring factions takes hold, it should logically result in more Libyan oil for the markets.

Under these circumstances it’s difficult to imagine how the global oil oversupply/glut could rapidly disappear, especially when world economic growth remains in the doldrums and doesn't show any sign yet of a good and sustainable revival.

So, Goldman Sachs saying in a recent report: “We view the oversupply as continuing well into next year before rebalancing in the fourth quarter of 2016 … adding, it’s the bank’s view that prices may need to fall to $20 to rebalance the market,” could be close to what could happen, which doesn't mean it will happen.

Investors who have patience and cash available “could,” which doesn’t mean “will” do rather well, waiting for stepping in until the bottom of the oil price “falls out” ($20 per barrel or even lower). Of course, nothing is written in stone …

Elsewhere, the Bureau of Economic Analysis (BEA) released the National Income and Product Accounts, which showed GDP growth during the third quarter came in at 2.1 percent year-on-year (y/y) and personal consumption rose by 3.2 percent (y/y), which was decent, but nothing extraordinary.

When we look at all these data and after the immense QE undertakings of the Federal Reserve, we could ask ourselves what’s wrong with the “money velocity” that remains at historical lows.

Money velocity measures the rate at which money in circulation is used for purchasing goods and services and therefore money velocity helps investors gauge how robust the economy is, and is a key input in the determination of an economy's inflation calculation.

Economies that exhibit a higher velocity of money relative to others tend to be further along in the business cycle and should have a higher rate of inflation, all things held constant.

I don’t think it’s an overstatement to say “money velocity” and the recovery in the U.S. remains a conundrum.

As far as I know, there is no decent explanation for that conundrum yet, which doesn’t mean we won’t find out one day …

In the meantime that conundrum “could” also be part of the reasons 2016 could surprise as well to the upside as to the downside.

Therefore, watch your financial steps in 2016.

Etienne "Hans" Parisis is a Belgian-born bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.

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On Tuesday, in the oil markets we got a somewhat unusual phenomenon when the price of Brent crude oil, which is the international price marker for crude, at the close quoted below the price of the U.S. price marker WTI...
investors, financial, planning, economy
Wednesday, 23 December 2015 10:35 AM
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