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How Energy Will Drive Everything in 2016

How Energy Will Drive Everything in 2016

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Wednesday, 06 January 2016 08:33 AM Current | Bio | Archive


The calendar is a relentless foe. No matter what you do, it keeps marching forward. Now it’s pushed us into 2016. What will the new year bring?

I think energy will be the common theme for much of this year’s financial news.  Just as blood flows through all your body, energy powers the world economy.

Supply/demand factors are bearish for both crude oil and natural gas. That should keep prices weak in 2016.

On the supply side, Saudi Arabia is no longer the swing producer. The OPEC cartel is dead; they just haven’t buried it yet. Iran will add yet more supply when it escapes economic sanctions, which should be soon.

Worse for OPEC, many struggling American energy producers break even in the $50-$60 range. They will uncap suspended production if crude gets that high. That puts a firm ceiling on the oil price.

Meanwhile, China’s diminishing demand for both energy and raw materials will weigh on commodity-exporting nations. Saudi Arabia and Russia will be especially problematic.

A wide assortment of global problems will emerge from this situation.

The Saudis, long accustomed to buying stability with oil proceeds, are finding that plan has limits. Vladimir Putin has a similar problem in Russia. He needs to keep Europe dependent on his natural gas, and to do so he is fomenting unrest in the border zone between the Middle East and his current customers. Hence, his defense of Syria’s Bashar Assad against Saudi-funded rebel groups.

Continuing conflict in Syria – which spills over into parts of Iraq and Turkey – will ensure a steady stream of refugees seeking entry to Europe. Angela Merkel’s open arms notwithstanding, people in Germany, France and the rest of the continent think they have helped enough. This will empower anti-immigration and nationalist movements throughout Europe.

Those parties tend not to like the whole “united Europe” idea. That means the already-strained alliance will face more pressure. I was wrong about 2015 being "The Year the Euro Dies," but 2016 will bring the currency union closer to its end.

Another consequence: defense spending growth. Europe is re-arming. So is Japan. The Saudis will keep bombing Yemen and ISIS will not go away quietly. The defense sector was a rare bright spot in 2015 markets and is set to do the same again.

Ironically, we may also see solar and other renewable energy stocks rally despite low fossil fuel prices. The last-minute GOP spending bill extended subsidies that were set to expire at the end of 2015. This is another blow the conventional energy sector doesn’t need right now.

Cheap energy limits inflation, which will make it very hard for the Federal Reserve to deliver the four rate hikes its “dot plots” project this year. Election-year rhetoric will keep investors nervous even if we don’t see any more Paris-like terror attacks.

We just finished a year in which few asset classes showed any significant return. Will 2016 be better? Maybe – but it could also be another year when investors are glad just to break-even.

Patrick Watson is an Austin-based financial writer. Follow him on Twitter @PatrickW

To read more of his insights, CLICK HERE NOW.

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The calendar is a relentless foe. No matter what you do, it keeps marching forward. Now it's pushed us into 2016. What will the new year bring?
Energy, sotkcs, invest, economy
527
2016-33-06
Wednesday, 06 January 2016 08:33 AM
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