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Winds of War Over Oil, Currency Make for Interesting Investment Times

By    |   Friday, 28 November 2014 04:59 PM

Before trying to understand the rationale why OPEC left in place its 30 million barrel production target, I’ve thought it might be helpful to look at the data from the Energy Information Administration (EIA)'s Official Energy Statistics from the U.S. government.

In that EIA report, we see that so far in 2014 the OPEC members have produced, on average, 32,095 million barrels per day during the eight months counted for so far, which is down by about 500,000 barrels per day compared to 2013 tally that registered an average of 32,541 million barrels a day.

Meanwhile, the rest of the world has produced 44,826 million barrels per day on average during the eight months counted for so far, which is up by about 1.4 million barrels from 43,412 million barrels per day on average over the same period in 2013. 

In my opinion it is clear Saudi Arabia will “try” to fight for maintaining its market share by letting oil prices slide further down, which should probably curtail to some degree further oil production extension by part of its competitors.

I wouldn’t try to search for any form of conspiracy theories notwithstanding that many oil producers are not happy with Thursday’s decision not to cut the production target.

I have no answer on how low could oil prices could drop. If the Saudis don’t get a sustainable assurance on what they consider as their "fair" market share, they could be willing to do whatever it takes to get it.

We could be on our way to a price zone somewhere north or even close to the $34.16 per barrel.

The way down, if it happens and which I think it will, won’t be a straight line downward but one with several bumps (upward corrections) that could be interesting opportunities for risk takers who understand the rules of the game. If that were to happen, there is no doubt in my mind this would cause turbulence, and in all markets. Of course, we aren’t there yet; no, not by a long shot.

That said, I wouldn’t invest in oil now and, once again, try to remain patient until panic sets in the oil markets.

By the way, according to International Energy Agency (IEA), U.S. shale production in the Bakken formation, which covers underlying parts of Montana, North Dakota, Saskatchewan and Manitoba and that covers about 200,000 square miles or 520,000 square kilometers, remains profitable in the $42 per barrel price zone.

Only 4 percent of U.S. shale production needs $80 per barrel, which is in fact not that important. The IEA also expects U.S. production to increase further by about 1 million barrels in 2015, which won’t please the Saudis at all, that’s for sure. Maybe, we could be on the verge of a totally unexpected “oil war.”

Take that alongside the possibility of a "currency war," and we are bound for interesting times.

Now, when you take all the above into account it becomes understandable why the Saudi Arabian Minister of Petroleum and Mineral Resources Ali bin Ibrahim Al-Naimi “bluntly” (it’s the first time I have seen such a negative attitude from him) refused to give any comment to reporters after the OPEC meeting on Thursday in Wien, Austria.

In the meantime, the United States continues to perform well albeit on a somewhat softer tone. Next week’s employment situation numbers should give us some more guidance on where we are heading from here on.

Unfortunately, the same cannot be said of the eurozone and the European Union (EU) as a whole. The just released unemployment rate for the eurozone shows it remained unchanged at 11.5 percent on a seasonable adjusted basis with the lowest rates in Germany (4.9 percent) and Austria (5.1 percent), and the highest rates in Greece (25.9 percent) and Spain (24 percent.)

Youth unemployment in the eurozone remained the highest in Spain (53.8 percent), Greece (49.3 percent) and Italy (43.3 percent.) 

Looking at the two most important economies of the eurozone, we saw German retail sales that rose by 1.9 percent month/month in October following a 2.8 percent drop in August. On an annual basis, German retail sales rose by 1.7 percent.

Meanwhile, French consumer spending weakened further to 0.9 percent m/m in October after a 0.5 drop in September. French producer prices also fell by 0.2 percent m/m in October and by 1.4 percent on an annual basis. No. that’s not promising.

And if all that wasn’t bad enough news, the inflation numbers point to renewed weakening to 0.3 percent, down from 0.4 percent in October in the eurozone.

Investors should try to remain realistic about Europe and certainly not believe in the fairytales the eurozone authorities try to sell to anybody who is disposed to believe them. Investors should keep in mind the European Union as a whole, as well as the euro in it’s today’s composition, would not be able to survive another serious crisis.

Next year will be challenging year for the markets everywhere and where one big “Black Swan” event, which is a metaphor that describes an event that comes as a surprise and that has a major impact, could set everything on its head.

Being prepared for whatever such an event could be, certainly won’t hurt any serious investor.

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Next year will be challenging year for the markets everywhere and where one big “Black Swan” event, which is a metaphor that describes an event that comes as a surprise and that has a major impact, could set everything on its head.
investing, black swan, markets, investor
Friday, 28 November 2014 04:59 PM
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