Dear PGM Capital Blog readers,
In this weekend’s blog edition, we want to discuss with you why Oil and commodities prices are falling and are now at a 5-year low.
CRUDE OIL:
Oil futures on Friday, November 28th, settled at their lowest level in five years as the Organization of the Petroleum Exporting Countries’ decision to keep crude production the same heightened, fears that the existing glut in the oil market would persist.
The US benchmark for Oil, “West Texas Intermediate” for delivery in January, closed at US$ 66.15 a barrel on the New York Mercantile Exchange, down US$ 7.54 or 10.45% from the closing price on Wednesday.
As can be seen from below chart, that was the lowest settlement for a front-month oil contract since Sept. 25, 2009, and it brought crude’s monthly losses to 18%, the largest one-month percentage decline since December 2008.
January Brent Crude – the global oil bench mark – had fallen more than 6% on Thursday when the NYMEX was closed for Thanksgiving. On Friday, November 28, on the London’s ICE Futures exchange it fell US$2.43, or 3.4% , to finish at US$70.15 a barrel, its lowest settlement since May 25, 2010.
Similar with WTI, Brent also lost 18% on the month and has been down for five straight months.
COMMODITIES PRICES:
On Friday, November 28, commodities retreated to a five-year low as crude oil tumbled after OPEC refrained from cutting output to ease a global glut. Gold and copper also declined.
The Bloomberg Commodity Index (BCOM) of 22 raw materials dropped as much as 2.1 per cent to 115.0054, the lowest since July 2009 as can be seen from below 5-year chart.
Spot gold fell 2.1 percent to US$1,167.35 an ounce, the lowest since Nov. 13 and the first weekly loss in four. Gold futures on the Comex in New York fell 1.8 percent to US$1,175.50.
Copper for delivery in three months traded 3.2 percent lower at US$6,351 a metric ton on the London Metal Exchange, the biggest weekly drop since April 2013.
PGM CAPITAL COMMENTS:
OPEC’s announcement on Thursday dashed hopes of an output cut that could boost prices, with the cartel showing it was willing to withstand the lower prices in order to defend its market share.
Market share has been under threat from growing production from countries outside OPEC, including shale-oil production from the U.S. and output from Latin American countries and from Russia.
Oil prices have lost nearly 40% of their value since a peak in June, and OPEC’s decision to maintain its current production ceiling of 30 million barrels a day does little to remove the glut that has kept oil prices low.
Drillers and miners were hit the most last week and saw their stocks plunging with more than 10 percent in the week of November 23rd.
History might be repeating itself: in 1986, the last time that oil drillers got caught up in a price war orchestrated by Saudi Arabia, it ended badly for the Americans.
In December 1985, Saudi Arabia declared its intention to regain market share and oil prices began to decline, sinking to as low as US$10.42 a barrel in March 1986 from a November 1985 peak of US$31.72 as can be seen from below chart.
By December of 1986, when OPEC reached a new production-sharing agreement the damage to U.S. producers had been done. Unemployment in the USA Oil states Oklahoma and Texas rose to respectively 8.9 an 9.3 percent, compared with the 7 percent national average. Production in Oklahoma fell 8.3 percent in 1986 and 7.1 percent in Texas, according to the Energy Information Administration.
Based on the above we believe that the current decline in crude oil prices will have a similar effect on the so-called USA shale revolution, which has a breakeven production cost of approx. US$ 75.00 per barrel.
For more information on the 1986 oil crash, please read the New York University report, entitled “Lessons from the 1986 Oil Price Collapse”
Similar with the BCOM, the CRB Index – the Commodity Research Bureau’s index of commodities – (An index that measures the overall direction of commodity sectors) has been struggling to stay up since 2011.
This index is a true reflection of the health of the US economy. As the CRB rises, the economy tends to be in “good shape”
As can be seen from below chart, the CRB hasn’t come close to its all time high of 2008, unlike most of the stock markets in the USA and most western countries.
The stock market should reflect the real economy and economic growth and real economy is highly dependable on energy and commodities. Which means that if the stock markets are at an all time high, commodity prices should be also be at an all time high.
So why the difference?
We believe that the value of the USA stock markets and those of most western countries, doesn’t reflect the state of their underlying respective economies, but is only up because the printed money by central banks has no other way to go than into the stock market.
Based on the above we believe that the elephant in the living room is the S&P500’s complete detachment from the CRB.
The result of this manipulation and money printing by Central Banks in order to manipulate markets, might lead to a disastrous long-term market correction or crash, which has all the potential of bringing the world in the second big depression.
History has proven, that in that case Central Banks will try to cure the deflationary cycle by printing even more money and by doing so, bringing the purchasing power of fiat currency to its real intrinsic value, which is ZERO.
History has also proven that, in that case Gold and Silver will be the only safe haven, for which reason their prices will shoot through the roof.
Below chart shows the development of Gold and Silver prices in “Reichsmark” during the German Weimar Republic.
The above sustains our point that the world today is engaged in a very cruel currency / commodity war, which is being fought on the capital markets.
Based on the Warren Buffett quote:
BE GREEDY, WHEN OTHERS ARE FEAR FULL and FEAR FULL WHEN OTHERS ARE GREEDY.
We believe that long-term investors now have a unique chance to add miners, drillers, commodities and precious metals to their portfolio.
Before following any investing advice, always take your investment horizon and risk tolerance into consideration and keep in mind that the price of Commodities, Precious metals as well as the stocks of their producers can be very volatile and that sharp corrections may happen in the short term.
Until next week.
Yours sincerely,
Eric Panneflek